Is $2 million enough to retire?

Retirement security is about having enough money to cover your expenses without depleting your savings. So it's natural to think that having a certain balance in your retirement accounts means you're prepared.

But how much do you need? What is the magic retirement balance figure? Is $2 million enough to retire?

You may have heard that or another figure as a general guideline to aim for. But the reality is everyone has different lifestyle goals and concerns for their post-working years. There's not just one target retirement number that works for everyone.

Let's explore the factors that influence how much you need to retire and whether $2 million is the right target retirement number for you.

Before you can decide if $2 million is enough to retire you need to estimate your future expenses. This is essentially your budget—what you'll need to spend from your savings. Along with the budget you've become accustomed to, consider some aspects that are unique to retirement:

• Income needs. Once you've retired, some expenses may fall, such as those associated with working or saving for retirement. Others may rise, such as health care, travel and inflation.
• Retirement length. Your life expectancy and the age at which you plan to retire both play a part in how much income you'll need. If you only spend 10 years in retirement, you may need a lot less than someone who spends 35 years in retirement. You can't predict this with certainty, so start with life expectancy tables such as those provided by the IRS and adjust based on your family history and personal health.
• Additional income streams. Account for other sources of income such as Social Security, pension or annuity income. This will replace a portion of your income and reduce the amount of savings you need to rely on.
• Health care costs. Prepare for unexpected health care expenses, especially those associated with long-term care. These costs could result in a temporary but significant increase in your spending.

This sets your retirement income foundation. If you have modest expenses and additional sources of income, then $2 million may be enough to retire. However, if your expenses are high, and you don't anticipate they'll go down, then you may want to plan to save more. Be willing to be flexible and monitor how your annual spending turns out, adapt as necessary.

This can range widely, of course, from a modest $40,000 at, say, 2% annual interest or $200,000 or more at 10%. But while the 60-year annualized stock market return is more than 10%, you should not count on getting that every year. The market could even bring you a loss. It's one reason many people hold diversified portfolios and become more conservative with their asset allocation as they enter retirement.

Your investing approach, time horizon and volatility comfort are the key factors in how much your money could earn in various accounts.

Generally, there's a trade-off between how conservatively you invest your money and how much it grows over time. More stable investments like savings accounts, bonds and certificates of deposit (CDs) may not fluctuate much or lose principal, but they generally earn lower rates of interest. Equity investments like stocks or mutual funds are more volatile, but they will typically grow more over time.

For example, placing money in a high-yield savings account earning 5% per year would generate $100,000 on a $2 million balance. But it can be difficult to count on securing a high earnings rate for very long. For comparison, a bond or CD with a fixed interest rate of 4% would yield $80,000 on the same $2 million balance. And then, a more aggressive approach, such as investing in the S&P 500, might earn 10% per year ($200,000), but it comes with significant volatility. The potential for substantial losses in any given year usually makes it too risky to last through retirement.

For most retirees, an investment mix such as a 60/40 portfolio, meaning 60% in stocks and 40% in bonds, provides a good balance. This split might achieve an 8% annual return, or $160,000 on average, offering more stability than an all-equity portfolio while being more volatile than bonds or CDs—but whether it's right for you depends on many factors. Knowing the trade-off between stability and growth—as well as your own risk tolerance—is crucial for making the best investment choices.

Inflation is the increase in prices over time. Over a long timeframe like retirement, you'll need to adjust for inflation in retirement to account for the decline in your purchasing power. Although you might earn $80,000, it won't buy as much next year as it does this year.

For example, if inflation goes up 3% between now and next year, $80,000 then will have the same purchasing power as $77,600 today. Another way to look at it is that you would need $82,400 to maintain your same purchasing power next year.

A simple way to account for this in your long-term projections is to subtract an inflation percentage estimate from your return percentage estimate. If your account is expected to have 5% in earnings, but inflation is projected to be 3%, then you might calculate only a 2% net gain to think about your account growth in terms of realistic purchasing power.

Free retirement readiness checklist

How ready are you to stop working? Our Retirement Readiness Checklist can help you stay organized and ensure you consider everything as you prepare for retirement.

A popular way to look at how much you can withdraw from your savings is to consider the withdrawal rate, or the percentage of your retirement savings that you can withdraw each year. The 4% rule is a retirement strategy that suggests if retirees withdraw no more than 4% of their retirement assets per year—considering inflation—they could reasonably expect their funds to last 30 years. Following this rule would allow you to withdraw $80,000 from a $2 million balance, then increase it for inflation each year.

While the 4% rule is a well-reasoned approach to retirement withdrawals, you may need to adjust it to fit your situation. For example:

• Your own retirement may be much longer or shorter than 30 years.
• The 4% rule assumes that you invest in a balanced portfolio with 50% to 75% of your money in stocks. More conservative or aggressive investments may not support a 4% withdrawal rate.
• Although the 4% rule was developed from historical data, the future may differ. A 4% withdrawal rate could prove to be too high, or it could cause you to underspend if your investments perform well.

There are many approaches to consider. The point is you need to explore your options and choose a withdrawal plan that works for you.

Yes, you can. If you know how you plan to spend your savings, understand your anticipated health care and housing expenses, and are willing to be flexible to adapt with economy changes. Take the necessary steps to be sure if $2 million is enough for you. Add up your expected retirement expenses—keeping in mind health expenses and emergencies—and subtract other income sources like Social Security. If you can adequately and safely cover the remainder with a specific withdrawal approach, then $2 million may be enough to retire. If not, consider what you can realistically tweak. Or keep saving until you have the amount you need.

This may sound like a lot of steps, but tools like this retirement income calculator can make it easier.

Hitting an arbitrary savings number is not the key to a successful retirement. A secure retirement comes from careful planning, so you know exactly how much you need for your specific goals and circumstances. Discuss your personal situation with a Thrivent financial advisor who can help you evaluate savings and investment options to help you achieve your retirement goals.