How to Retire With $2 Million

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Editor's Note: This story originally appeared on SmartAsset.com.

For years, financial experts have suggested a target retirement savings goal of $1 million. But when you consider things like inflation, the rising cost of health care and longer life expectancies, that amount of money may not go as far as you think.

Aiming for $2 million in retirement savings might be more realistic or even necessary to enjoy the type of lifestyle you want. But is it possible to retire with $2 million, and if so, how much do you need to save and invest annually? And can you retire with $2 million if you’re getting a late start on saving or don’t make that much money?

Here’s an overview of the careful planning and work needed to reach $2 million.

Why Retire With $2 Million?

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Saving $1 million for retirement may seem like more than enough money, especially if you’re contemplating a more frugal lifestyle. For example, if you plan to downsize your home, cut out frivolous spending and maintain good health to curb medical costs, then you might assume you can easily get by on $1 million.

However, it’s important to consider how far $1 million for retirement can really go. Even if you’re supplementing your savings with Social Security benefits, a pension or annuity, there are certain things you may have no control over that could derail your retirement plans.

Developing a serious illness, for example, could lead to a stay in a long-term care facility. If you don’t have a long-term care insurance policy, the cost of living in a nursing home could drastically undercut your retirement savings.

Then there are other things like inflation and market volatility to account for. When prices for consumer goods and services rise, your purchasing power diminishes. That means your money doesn’t go as far. If inflation is paired with market volatility which affects the value of some of your investments, that could lead to losses which means less money for you to live on.

And of course, you have to factor in longevity. As living to 90, 95 or even 100 becomes the norm, that can put a strain on a $1 million nest egg. Without proper planning and budgeting, it’s possible that you could run out of money sooner rather than later. All of those things can make saving $2 million for retirement a more attractive goal.

How to Retire With $2 Million

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If you want to retire with $2 million or more to your name, there are certain things you’ll need to do to make it happen. Otherwise, you may fall short of your goal. Here are some of the most important things to keep in mind as you map out your retirement savings strategy.

Estimate Your Retirement Budget

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The first step in saving $2 million for retirement is determining whether that’s a good number to aim for, based on what you plan to spend later. Creating a hypothetical retirement budget can help you estimate what you’ll spend year to year and what your target retirement withdrawal rate should be.

Your retirement budget should include the normal costs of living, including:

  • Housing
  • Utilities
  • Food
  • Transportation

But you may also need to include medical and health care spending as well as any money you plan to spend to maintain a certain lifestyle. For example, that might include travel expenses or money you spend on hobbies.

Also, consider where debt fits into your retirement budget. If you want to retire with $2 million and no debt, then you’ll have to figure out you can save and pay down debt aggressively during your working years.

Consider Your Timeline

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Once you have a retirement budget in mind, the next step is breaking down your $2 million savings goal. This is as simple as estimating how long you have to save, based on your current age and when you hope to retire. For example, if you’re 25 now and want to retire at 65, you’ll have 40 years to save and invest. You’ll have to grow your portfolio by $50,000 a year on average. This includes money you contribute directly and the earnings on your investment portfolio.

If you’re getting a late start, say at age 35 instead, you’ll need to decide whether retiring at 65 with $2 million is a realistic goal. Having 30 years to save means you’d need to increase your portfolio by $66,666 a year on average. If you don’t think you can do that at your current savings rate and rate of return, then you may need to consider waiting until 70 or 75 to retire in order to hit the $2 million mark.

Use Tax-Advantaged Plans

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Tax-advantaged plans are the first place you may look to start saving for retirement. If you have a 401(k) plan at work and you want to save $2 million for retirement, maxing out contributions each year could help you get there. If your plan includes an employer matching contribution, that’s free money that you can add to the retirement savings pot.

After 401(k) or similar plans, you might consider an individual retirement account next. Whether it makes sense to choose a traditional IRA or a Roth IRA can depend on your current tax situation and where you expect to be tax-wise in retirement.

If you’re in a higher tax bracket now, you might find the deduction allowed for traditional IRA contributions valuable. Of course, this depends on whether you expect to be in a lower tax bracket when you retire, at which time you’d have to pay taxes on withdrawals from your IRA.

On the other hand, you may choose a Roth IRA if you anticipate being in a higher tax bracket in retirement. And with $2 million or potentially more saved, it’s possible that you might be, based on how much you withdraw each year. In that case, you may benefit more from being able to take tax-free withdrawals from a Roth IRA.

Invest in Stocks With an Online Brokerage Account

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Contributing to a workplace retirement plan or IRA is a starting point but you may need to expand your investment options to reach your $2 million retirement goal. Opening an online brokerage account allows you to continue building your portfolio, beyond the annual contribution limits for tax-advantaged plans.

You can use a brokerage account to invest in stocks, mutual funds and exchange-traded funds (ETFs). Some brokerages also offer bonds, futures, options and even cryptocurrency trading, if you’re looking for more ways to diversify.

Investing in stocks is particularly important if you’re trying to retire with $2 million because they offer the best potential for growth compared to other investments. Stocks are riskier, but the longer your time horizon is for investing, the more time your portfolio has to recover from periods of volatility.

When choosing an online brokerage, be sure to pay attention to the investment selection as well as the fees you’ll pay to trade. Ideally, the brokerage you choose offers commission-free stock and ETF trades, which can allow you to keep more of the returns you’re earning from those investments.

Increase Your Savings Rate Year to Year

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Saving 10% to 15% of your income is a commonly accepted rule of thumb for retirement planning. But saving that amount may not be enough if you’re trying to reach $2 million in assets by the time retire.

Instead, you may need to save 20%, 30% or even more of your income to hit the target. If you can’t afford to invest that much of your income now, you can increase your savings rate year to year. For example, if you’re saving in a 401(k) and you get a 2% pay raise each year you can divert that extra 2% to your retirement account. Or as you pay off debts, you can redirect the money you were using for those payments to your online brokerage account.

The Bottom Line

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Retiring with $2 million can increase your financial security tomorrow if you’re willing to put in the effort to save and invest today. Whether it’s possible for you to retire with $1 million, $2 million or more can depend on the details of your financial situation.

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