Can You Retire at 60 With $2.5 Million? A Deep Dive Into Long-Term Sustainability

Retirement planning has always been a balancing act between ambition and prudence. For those aiming to retire at 60 with a $2.5 million portfolio, the question is not merely whether the sum is sufficient but how to structure it to endure decades of inflation, market volatility, and unforeseen expenses. Recent research from Morningstar, PGIM, and the updated Trinity Study offers a nuanced framework for assessing long-term sustainability. This article unpacks the critical factors—strategic withdrawal rates, tax efficiency, and healthcare preparedness—to determine whether $2.5 million can truly support a secure retirement.

Strategic Withdrawal Rates: Beyond the 4% Rule

The traditional 4% rule, a cornerstone of retirement planning since the 1990s, has been increasingly challenged by shifting market dynamics. Morningstar's 2024 analysis suggests a baseline withdrawal rate of 3.7% for new retirees in 2025, adjusted for a 30-year horizon. This figure reflects updated capital market assumptions, including higher bond yields and stabilized inflation. However, the 3.7% rate is not a rigid mandate. Retirees must instead treat it as a starting point, adjusting dollar amounts annually to account for portfolio growth and inflation.

For example, a $2.5 million portfolio at 3.7% yields $92,500 in the first year. If the portfolio grows by 5% annually (a plausible assumption for a balanced stock-bond mix), the same 3.7% rate would generate $110,000 in the second year, effectively outpacing inflation. This flexibility is critical. As PGIM's “guided spending rates” emphasize, retirees with shorter horizons (e.g., 20 years) can safely withdraw up to 5% or even 7%, while those with longer horizons must adopt more conservative rates.

The updated Trinity Study reinforces this logic. A 3.5% withdrawal rate with a 100% stock allocation has a 100% success rate over 30 years, but the same rate with a 60/40 stock-bond mix drops to 98%. This highlights the trade-off between growth and stability: while equities offer higher returns, they also expose retirees to “sequence of returns risk,” where early market downturns can deplete a portfolio. A diversified approach, therefore, is essential for those retiring in their 60s.

Tax Efficiency: The Hidden Drain on Portfolio Longevity

Even with a well-calibrated withdrawal rate, tax inefficiencies can erode a $2.5 million portfolio. A proportional withdrawal strategy—drawing from taxable, traditional, and Roth accounts in proportion to their total value—can mitigate this. For instance, a retiree with $1 million in taxable accounts, $1 million in traditional IRAs, and $500,000 in Roth accounts would withdraw 3.7% from each, spreading taxable income and avoiding spikes that trigger higher tax brackets.

The traditional withdrawal order—taxable first, then tax-deferred, and finally Roth—also remains a viable strategy. By exhausting taxable accounts early, retirees can preserve tax-advantaged accounts for later, when they may need income but have lower tax rates. For those eligible for the 0% long-term capital gains rate, this approach is particularly potent.

Roth accounts, meanwhile, offer a unique advantage. With tax-free withdrawals after age 59½, they should be preserved for later in retirement. A Monte Carlo simulation (a tool recommended by Fidelity and others) can help retirees test scenarios, such as whether a 5% withdrawal rate from Roth accounts in Year 20 would leave sufficient funds for essential expenses.

Healthcare Preparedness: The $165,000 Question

Healthcare costs are the wildcard in retirement planning. Fidelity's 2024 estimate that a 65-year-old couple needs $165,000 in after-tax savings to cover healthcare over their lifetime underscores the urgency. For a $2.5 million portfolio, this means allocating at least $66,000 annually (or $165,000 over 2.5 years) to healthcare, assuming a 30-year retirement.

The challenge lies in the compounding effect of healthcare inflation, which historically outpaces general inflation by 1–2 percentage points annually. A $165,000 reserve today could lose 30% of its purchasing power in 15 years if healthcare costs rise at 4% annually. Retirees must therefore build a dynamic healthcare budget, factoring in rising premiums, deductibles, and the likelihood of long-term care needs.

One solution is to use a portion of the portfolio to purchase long-term care insurance or a health reimbursement arrangement (HRA). For example, a $2.5 million portfolio could allocate $500,000 to a tax-efficient healthcare fund, invested in low-volatility assets like municipal bonds or healthcare ETFs. This ensures that healthcare costs do not force the liquidation of equities during market downturns.

The Final Equation: Can $2.5 Million Sustain a 60-Year-Old?

Combining these elements, a $2.5 million portfolio can indeed support a 60-year-old retiree—if managed with discipline and adaptability. A 3.7% initial withdrawal rate ($92,500) adjusted for portfolio growth and inflation, paired with tax-efficient strategies that preserve Roth accounts, creates a foundation for longevity. Allocating $165,000 to healthcare upfront and another $500,000 to a dedicated healthcare fund ensures that medical expenses do not derail the plan.

However, success hinges on regular re-evaluation. Capital market assumptions, tax laws, and personal circumstances evolve. Retirees must revisit their strategies annually, using tools like Monte Carlo simulations to stress-test their plans. For those with shorter horizons, a 5% withdrawal rate may be feasible, but for those expecting to live into their 90s, prudence is paramount.

In the end, retiring at 60 with $2.5 million is not a binary question of “yes” or “no.” It is a call to action: to build a retirement plan as dynamic and resilient as the markets it navigates.