Is $2.5M Enough To Spend $100K A Year In Retirement, Or Will Taxes Make That Impossible?

When you are making plans for retirement spending, you need to take many costs into account — including taxes. If you are hoping that $2.5 million will provide you with $100K, you should consider both whether that income is possible at a safe withdrawal rate and how your tax bill is going to affect the amount you have left over to spend. 

Is $2.5 million enough for a $100K annual retirement income?

Before you even consider the impact of taxes, you need to make a decision on a safe withdrawal rate.

Experts traditionally recommended that you follow the 4% rule if you wanted the best chance of your money lasting for at least 30 years. Since that rule says you can withdraw 4% of your account balance in your first year of retirement and then make inflation-based adjustments, your $2.5 million could produce exactly $100,000. 

However, experts have now revised that downward to say you should limit withdrawals to 3.7%. There have also long been questions as to whether the 4% rule is conservative enough, especially as projections for future returns have gotten lower and projected future lifespans have gotten longer. 

If you don’t mind taking a greater chance of your money running short, you could still stick with the 4.00% rule and assume you’ll be able to withdraw $100K from your $2.5 million account without problems. But, if you don’t like the idea of cutting things so close, you may be better off aiming to save a little more to give you a cushion — even before you consider the issue of how taxes will impact your ability to spend $100K. 

Will taxes eat away at your retirement income?

Now, you have another issue to deal with: Taxes. Let’s say you do decide you’re OK with taking $100K per year out of your accounts. The question becomes, how much of that money will you have to give to the IRS and to your state or local government? If you were hoping to have $100K after taxes to spend, will that be possible?

The answer to that is: It depends. If you have put all of your money into a Roth IRA or Roth 401(k) account, then you don’t have to worry about taxes as long as you follow the rules for tax-free withdrawals. If you take $100K out, you can spend it all.  If you want to take the simplest approach and not have to think about the impact of taxes on your investments, this is most likely the route you should go.

If you have a traditional 401(k) or IRA, though, then taxes become more of an issue. You’re taxed on 401(K) and IRA withdrawals at your ordinary income tax rate and you’re required to start taking required minimum distributions at a certain point in retirement. Because of this, it’s inevitable you are going to have less than $100K to spend.

If you use a taxable brokerage account, on the other hand, then you are taxed when you sell assets at a profit but you pay the capital gains tax rate which is much lower than the ordinary income tax rate.  Depending on how high your income is, your tax rate could be as low as 0%.  

You’ll also want to research the rules for how your state government taxes retirement income and consider living in a state that’s not going to impose a big bill.

Ultimately, if you hope to get $100K after tax out of $2.5 million invested, you need to be sure you’ve made tax-efficient investment choices — and even then, you may want to aim for a higher target number to make sure you can generate the income you need for the rest of your life once your paychecks stop coming.  Talking with a financial advisor could be the best option for you as your advisor can help you to make a solid plan for generating the after-tax income that you need as a retiree. 

The post Is $2.5M Enough To Spend $100K A Year In Retirement, Or Will Taxes Make That Impossible? appeared first on 24/7 Wall St..