Answers · 401(k) Rollover

Is $2 million enough to retire at 67?

For most households, yes. Two million at a withdrawal rate built for a thirty year retirement produces about 80,000 dollars a year before tax, and Social Security usually adds another 40,000 on top. At this balance the question stops being whether the money lasts and becomes what the tax code does to a large pre-tax account.

Yes for most households, and that is the least interesting part of the answer.

Start with the arithmetic. Two million dollars at 4 percent is 80,000 a year before tax. Add a household Social Security benefit of 3,400 dollars a month, as illustrative arithmetic, and the gross income is about 120,800 a year.

Sixty seven is the one age where that 4 percent figure is doing roughly the job it was designed for. The study behind it tested 30 year retirements. We wrote out where the rule came from on our page about how much money you need to retire, and why a 55 year old has to shade it down.

So if your bills are 90,000 a year, this works with room left over. If they are 150,000, it does not, and no product fixes that. Almost nobody with 2 million runs out of money. They run into something else.

At this balance Social Security is the junior partner, which reverses the usual advice.

A household with 500,000 saved usually finds its Social Security is worth about twice the account, so the claiming decision moves more money than any investment decision. That is the whole shape of our page on retiring at 60 with 500k.

Here it runs the other way. About 40,800 a year of Social Security against 80,000 from the pile means your savings carry roughly two thirds of the income. Claiming still matters. It just stops being the thing that makes or breaks the plan.

It becomes a tax decision instead. Waiting from 67 to 70 raises the check by about 24 percent for life, and it holds your taxable income down in exactly the years you may want it down. The break even arithmetic is on our page about taking Social Security at 62, 67 or 70.

Two million in a 401(k) is not two million, and at 73 the withdrawals stop being your choice.

A pre-tax balance is quoted in a currency you cannot spend. Every dollar out of a 401(k) or a traditional IRA is ordinary income in the year you take it. At an illustrative 18 percent effective rate, an 80,000 dollar withdrawal is closer to 65,600 in your hand.

The part that catches people is 73. Required minimum distributions begin. The amount is your balance divided by a factor from an IRS table, and the factor for a 73 year old is about 26.5, so a 2 million dollar pre-tax balance forces out roughly 75,000 dollars whether you wanted it or not.

The factor shrinks every year after that. At 80 it is about 20.2, which on the same balance is about 99,000. If the account grew in the meantime, the forced withdrawal grows with it. That is where most of the tax surprises at this balance come from, and all of it is visible six years ahead.

The order you spend from sets your tax bill and your Medicare premium.

Most people at 67 are holding three kinds of money: pre-tax, Roth, and a plain brokerage account. A pre-tax withdrawal is ordinary income in full. A brokerage sale is taxed only on the gain, often at a lower rate. Roth money is generally neither.

Spending them in a different order changes what you owe on the same 80,000 dollars of spending, and it changes what Medicare charges you, because Part B and Part D premiums are set from your income two years earlier. Our page on rolling a 401(k) to a Roth IRA covers that surcharge, and the years between retiring and 73 when the brackets sit at their widest.

At 2 million dollars this is the work worth paying someone for. It is tax and investment work rather than insurance work, and it is not what we do.

When one of you dies, the income falls and the tax bill does not.

The household keeps the larger Social Security check and loses the smaller one. On the numbers above, 40,800 a year might become 26,400. The survivor then files as single, with half the standard deduction and narrower brackets, and the Medicare income thresholds for a single filer sit at about half the married ones. Our page on the biggest Social Security mistake walks through that.

A large pre-tax balance makes it worse in a specific way. The required withdrawal does not fall when a spouse dies. Nearly the same forced income lands on a single return, against a smaller check and a smaller deduction, so the rate on the survivor's money can go up in the same year their income goes down.

Run those numbers while both of you are here. Nearly everything you can do about it has to be done while you are still filing jointly.

At this balance what we sell usually answers a question you do not have.

opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and an insurance company pays us when somebody buys a contract. Read this section with that in mind.

The job an income contract does is insure you against outliving your money. At 2 million, with Social Security on top and spending inside 4 percent, that risk is already small. So the usual pitch to move a large share of the account into a contract is selling you cover for a risk this household has largely covered on its own.

It does not touch the tax problem either. Moving a pre-tax balance into a contract inside an IRA does not reduce the distribution the IRS requires at 73. Where a contract can honestly fit is narrower: the survivor's gap above, or a floor under the bills you cannot skip so the rest of the portfolio can be left alone in a bad year. Any guarantee in one depends on the claims paying ability of the issuing insurance company.

Related

How much income does 2 million dollars produce in retirement?

About 80,000 dollars a year before tax at a 4 percent withdrawal rate, and that figure is built for a retirement of roughly 30 years. Retire earlier and the rate that survives a longer horizon is lower. The amount you can actually spend depends on how much of the 2 million sits in a pre-tax account.

Do I have to take money out of my 401(k) at 73 even if I do not need it?

Yes, from a pre-tax 401(k) or traditional IRA. Required minimum distributions currently start at 73 for most people reaching it now. The amount is the balance divided by a factor from an IRS table, roughly 26.5 in the first year, and the whole withdrawal is ordinary income. A Roth IRA has no required distribution for the owner.

How much of my Social Security is taxable at this income?

At an income like this, the maximum applies and 85 percent of the benefit is included in taxable income. The thresholds that decide this were written into the law and are not adjusted for inflation, which is why almost every household at this balance lands at the top of the range.

Should I put 2 million into an annuity at 67?

Rarely the whole amount. An income contract insures against outliving your money, and at this balance that risk is already small. It also does nothing about the distribution the IRS requires at 73 if the money is in an IRA. A slice sized to the bills you cannot skip is a different conversation from moving the account.

Is 2 million enough to retire at 62 instead?

Usually, but the arithmetic changes twice. The horizon is longer, so the withdrawal rate that survives it is lower, and you are buying your own health insurance until Medicare at 65. Our page on retiring at 55 with 3 million walks through what that bridge actually costs.

Where this fits.

This question sits inside a bigger one. 401(k) Rollover walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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