What if I Have $2 Million Saved for Retirement? Is It Really Enough to Stop Working?

According to research from Fidelity, baby boomers have an average 401(k) balance of $260,300 and an average IRA balance of $286,700. Those averages aren't very high, but, of course, some people have much more invested than others.

So how much is enough? Say, for example, that you have $2 million saved. Can you enjoy a life of freedom and not worry about having to earn a paycheck to cover your bills? Let's take a look at what a retirement nest egg of $2 million can do for you.

Image source: Getty Images.

Is retiring with $2 million enough?

While $2 million may seem like a small fortune, especially for those with limited retirement savings, the reality is that this money can't just be spent. It has to last throughout retirement, and some of its value is likely to be eroded by inflation.

You want to leave enough in your account to ensure that some of your funds will be making money and earning returns. If you drop your account balance, your investments won't have as much opportunity to earn. This puts you at greater risk of running out of money.

Maintaining a safe withdrawal rate is critical, and this has often meant following the 4% rule. The general premise is that you can withdraw 4% of your account balance in year one of retirement, adjust upward each year to account for inflation, and have a pretty good chance of the money in your retirement plans lasting.

Assuming you follow the 4% rule, a $2 million nest egg would produce $80,000 in year one. When combined with Social Security, that would be enough for most people -- but definitely not everyone.

When is $2 million not enough?

Ultimately, whether you can retire in comfort with $2 million depends on what comfort means to you. For some people, $80,000 from a 401(k) is more than enough to cover the bills. For others, especially those who have been earning a lot of money and who have made lifestyle decisions based on a high income, this may fall far short.

And there are other situations where you may find that you don't have the security you want -- even with $2 million. For example, you may end up needing long-term care.

If you're retiring young and have to pay for private health insurance, if you plan to spend a lot of money helping out your kids, or if you face serious health problems and have substantial medical care costs Medicare won't pay for, you could also find yourself in a situation where you don't have enough.

Once you know how much income your $2 million is likely to produce, compare that with your spending needs. This allows you to make a truly informed choice about whether your nest egg is going to fall short or provide you with what you need.

The Motley Fool has a disclosure policy.