How To Retire Forever On A Fixed Chunk Of Money
Retiring forever should always be the goal. No one wants to work only to retire and then need to return to the workforce.
Avoiding this situation requires carefully planning your retirement strategy, saving money diligently over your career with low-cost or free investing apps and platforms and right-sizing your expenses to your budget.
If you can accomplish these goals over time, you can learn to live like no one else by living like no one else.
What Does The Typical Retirement Cost
According to the Bureau of Labor Statistics, in 2020 the average senior spent approximately $45,579. Assuming a 25-year retirement, the total cost would come to $1.139 million. So the $1 million mark doesnt seem too far off.
A big chunk of that spending is related to healthcare. According to Fidelity Investments, the average 65-year-old couple can expect to spend around $300,000 for medical expenses over the rest of their life. That figure doesnt include long-term care costs for retirees who require assisted living services or in-home healthcare. Insurance firm Genworth estimates the annual cost for nursing home care in a private room at about $108,408.
While Medicaid can cover long-term care expenses, Medicare does not. And qualifying for Medicaid may require retirees to spend down their retirement assets to become income-eligible. Social Security benefits can help supplement retirement savings but they will only go so far. For 2022, the maximum Social Security benefit is $4,194, but the average monthly benefit is $1,657.
Crunching the numbers, the idea of retiring on $500,000 may seem out of reach. But dont count it out completely. Youll just need to estimate accurately and manage your living expenses, both before and after retirement, to make it happen.
How Many Years Will $500k Last In Retirement
If your savings total $500k, and you realize average returns and follow the 4 percent rule, you can expect to have $20k per year for 30 years. Thats fine if you retire at 70, as you arent likely to outlive your savings. It is a greater concern if you choose to retire earlyespecially if your retirement plans include expenses like traveling the world.
The good news is that you have options to stretch your savings if your primary goal is to escape traditional employment. For example, you can choose to make your home in an area with a low cost of living.
Some retirees have gone all the way to South America, where they can enjoy a comfortable lifestyle on very little income.
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Putting It All Together
After you’ve answered the above questions, you have a few options.
The table below shows our calculations, to give you an estimate of a sustainable initial withdrawal rate. Note that the table shows what you’d withdraw from your portfolio thisyear only. You would increase the amount by inflation each year thereafteror ideally, re-review your spending plan based on the performance of your portfolio.
We assume that investors want the highest reasonable withdrawal rate, but not so high that your retirement savings will run short. In the table, we’ve highlighted the maximum and minimum suggested first-year sustainable withdrawal rates based on different time horizons. Then, we matched those time horizons with a general suggested asset allocation mix for that time period. For example, if you are planning on needing retirement withdrawals for 20 years, we suggest a moderately conservative asset allocation and a withdrawal rate between 4.9% and 5.4%.
The table is based on projections using future 10-year projected portfolio returns and volatility, updated annually by Charles Schwab Investment Advisor, Inc. . The same annually updated projected returns are used in retirement saving and spending planning tools and calculators at Schwab.
How To Catch Up If Youre Behind On Your Retirement Savings Goals
Once you know how much you will realistically need in retirement, you may find that youre not where you should be in terms of retirement savings. Fortunately, there are ways to catch up. If you are 50 or older, you are able to make what are known as catch-up contributions to pad your retirement savings.
Individuals age 50 and over can potentially contribute $6,000 plus an additional $1,000 per year to a traditional or Roth IRA, Wetters said. Within 401 and 403 plans, these same individuals may have the ability to contribute $20,500 plus an additional $6,500 per year to catch up.
If you are younger, time is on your side.
Start investing as soon as possible to take advantage of compound interest, Custovic said.
On the other hand, if you are nearing retirement, you may consider ways to cut back on your expected living costs.
Consider downsizing or moving in retirement, Custovic said. If you own a home and can sell it, take some of that equity and use it towards retirement.
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Investment Assumptions Around Assets Needed To Retire On $500k
When youre thinking about how long youll need money in your retirement, youll need to consider the investment assumptions around the assets youll have when retiring.
Some good rules of thumb for the investment assumptions needed for retiring on $500k, consider the following items:
- Investing in a diversified portfolio of 60% stock investments and 40% bond fund investments
- Using more conservative historical returns, also accounting for potential economic uncertainties ahead
- Expect to earn 5-7% on this portfolio with a rough 8% per year average in stocks and 4% in bonds- be cautious of overly aggressive return projections and also know that these are annual averages
- Given the lower level of retirement assets and the early retirement without access to Social Security benefits at 60, I suggest being overly conservative with your return assumptions on a portfolio like this
If you decide to retire at 60 with $500k in assets, youll need to create a budget for what you think your expenses will be in retirement. As a going in assumption, most people spend about 80% of their current expenses while working.
This assumes you have paid off your house and enter retirement with no major debt and relies largely on expenses related to insurance, utilities, food, housing upkeep and maintenance and other lifestyle expenses sized to your budget.
If you have several income sources providing you a steady amount of cash flow, youll need less reliance on your invested assets now.
Things To Consider When Retiring
- Inflation is rising whether you like it or not. So plan accordingly or decrease your lifestyle.
- Per the U.S. Department of Health and Human Services, you have a 70% chance of going into a Nursing Home, Assisted Living Facility, or Home Health Care. So buy long-term care insurance now.
- There is a 100% chance you will die, buy affordable life insurance, or at the minimum, burial insurance for funeral expenses.
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Can A Pension Help Me Retire
A pension is a type of employer-sponsored retirement plan. Unlike a 401 or IRA, you dont contribute to your pension.
Instead, your employer contributes to an investment portfolio for workers. When a worker retires from the company, the employer agrees to make monthly pension payments for the rest of the employees life.
Employers calculate pension amounts using the length of time the employee worked for the company. Someone who retires after 30 years of working will receive a larger pension than someone who only worked at the company for 5 years.
Pensions are a lot less popular than in the past. Most employers have switched to providing 401 plans instead of pensions. However, some industries are more likely to offer pensions, such as:
- Public teachers
- Utilities and transportation
- Union positions
If you have a pension and work for a company for a long time, you may need to save less for retirement. However, youll still have to consider your future costs in addition to your retirement income.
How Much Income Can $500k Generate In Retirement
Its impossible to estimate precisely how much income $500k will generate in retirement because certain factors cant be predicted. For example, how your portfolio is structured makes a big difference to your income, as do your specific investments. Stocks that pay dividends and high-growth securities offer more in the way of income, but they carry a higher risk than options like bonds and cash.
Ideally, even when you start taking distributions from your portfolio, the remaining principal will continue to generate returns. However, setting that aside, $500k can generate roughly $20k per year, assuming average returns, if you follow the 4 percent rule.
The 4 percent rule is a standard recommendation that retirees withdraw no more than 4 percent of their assets each year. The goal is to stretch your savings so that you dont outlive your income. At the age of 70, the combination of $20k per year plus Social Security may be enough for your retirement, depending on your lifestyle.
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Spending From Your Assets
To close the gap between the income you need and the income you have, youll need to spend from your assets.
Live Off the Earnings?
Some people imagine retirement as a time when they live off the income from their savings. But for most people, including the clients I typically work with, thats not a reality. Especially if you plan to retire with $500k in assets, you will probably need to spend down your assets. Thats because interest rates are relatively low, and most retirees prefer to avoid taking major risks with their life savings.
To save enough to avoid spending from your principal, you might need to continue working longerwhich isnt always an option. The other option is to save so much of your income that its hard to enjoy yourself and make memories during your working years. Thats probably not very appealing, either.
A Safe Withdrawal Rate?
Its critical to make your money last. You dont want to run out of savings before you die, as youd need to make unwelcome sacrifices at a time in life when youre vulnerable. So, how much is safe to spend? One rule of thumb suggests that you can spend 4% of your savings per year. The success of that strategy depends on several factors , and the topic is constantly debated. Still, the 4% rule can be helpful as a starting point for learning where you stand.
To calculate your 4% amount for Year 1, multiply your retirement savings by 0.04 or use the tool below.
Ways To Make Your Savings Last Longer
A calculator like the one above can be a helpful guide. But its hardly the final word on how far your savings can stretch, particularly if youre willing to adjust your spending to suit some common retirement withdrawal strategies.
Below are some smart rules of thumb on how to withdraw your retirement savings in a way that gives you the best chance of having your money last as long as you need it to, no matter what the world sends your way.
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Breaking It Down: Where Do You Fit In
There are many reasons you might think this chart seems totally reasonable, or, conversely, totally unreasonable. And thats understandable. Life presents us all with different challenges. We have unexpected medical expenses, decide to go back to school, or have kids and want to pay their college tuitions. These are all perfectly valid excuses as to why you might be falling behind where this chart says you should, or could, be.
Based on this chart, you would think that most Americans should be retiring as multi-millionaires at age 65. This probably seems way off-base, and in reality, it is most people retire with very little in the way of savings and investments. The point is that this chart shows what is possible if you are disciplined and strategic about your 401k savings.
If you are on the younger end of the ages shown on the chart, you may be daunted at the prospect of contributing $8,000 per year to your 401k, not to mention $19,500. Where you live, what your first-year salary is, or what loans you may be paying can make it difficult for this contribution to seem realistic. Its crucial, however, to recognize the importance of saving as much as you can for retirement as early as you can.
So, lets determine, based on the two scenarios in the potential savings chart, whether these figures would be sufficient to support your lifestyle for the rest of your retirement.The average life expectancy for men is around 84 years old, and 86.5 years old for women.
Where Do I Want To Live In Retirement
A $500,000 nest egg will go much further in certain parts of the country than in others. While your personal lifestyle choices will also play a role in how quickly you spend down your savings, the place you decide to call home will dictate how much you’re likely to spend.
Put in a little time researching affordable states for retirees. Keep in mind that some states impose a tax on Social Security benefits, while others do not.
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Can You Retire With $500k Yes If You Time Retirement Right
CEO, The Annuity Expert
Regarding retirement planning, most people think you need a million dollars or more to retire comfortably. But what if we told you that you could retire with just $500,000? It may sound too good to be true, but its not! This guide will discuss how you can achieve a comfortable retirement lifestyle with just half a million dollars. So whether youre just starting in your career or are nearing retirement age, read on for some valuable advice!
Where Do You Stand So Far
As shown below, only 26% of people in their 60s have over $500,000 set aside for retirement. You can see the average retirement savings ranges at different ages, but everybodys situation is unique.
Average Retirement Savings at Age 65
Reminder: The median is the middle of all answers from biggest to smallest. Data source: Hou .
Example: Assume you want to retire on $500k of assets in your IRA, 401, and taxable accounts. You want to spend roughly $52,000 per year. Your Social Security benefits amount to $24,000 per year, and you have an additional pension of $6,000 per year.
Subtotal: You have $30,000 of income per year, and you need an additional $22,000.
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Is 500k Enough To Retire On What Do You Think
You came into this post asking yourself the question, Can I retire with 500k?
If youre retiring very soon and can live frugally, then yes, you can probably retire with $500k.
And, if you intend to live in another country in your retirement to survive on much less per month, then this option will likely work for you as well.
Outside of that, living on 500k dollars is pretty tough, especially if youre trying to make it last for more than 30 years.
Inflation is just such a monster to battle for that long! Thankfully, you may get some reprieve if Social Security is still paying out the average $1,500 payment each month. If its not, youre going to be pinching pennies for a long time.
Long story short, if you can only muster up $500k for your retirement account, you can probably make it work. But, if you can bump this number up, it is certainly recommended!
How about you? Are you targeting $500k for your retirement? Is it the right number for you?
Am I Setting Funds Aside For Healthcare
Chances are, healthcare will be one of your greatest retirement expenses, if not your single greatest one. But if you’re socking away money to pay for your future medical needs, it could take some pressure off your nest egg.
Many workers have the option to put money into a health savings account, or HSA, and if you’re enrolled in a high-deductible health insurance plan, that option may be available to you as well. The money you put into an HSA can be carried forward indefinitely, so if you max out those contributions and don’t take withdrawals from your account, you may not need to save as aggressively in a 401 or IRA.
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Can I Retire At 55 And Keep Working
Yes. Just because youve taken your private pension and decided to retire at 55 doesnt mean you have to stop working.
Maybe you feel like you need to top up your pension by adding a few more years of part-time salary to it. Or maybe you want to access your pension pot at 55 and enjoy more free time, but youre not ready to fully retire just yet.
Just because you choose to access your pension, doesnt mean you HAVE to retire.
Many of our clients will do some freelance or consultancy work on the side to help top up their income each month.
Can You Retire On $500000
In simple terms, planning for retirement is a numbers game. Many experts recommend saving at least $1 million for retirement, but that doesnt take your individual goals, needs or spending habits into account. In turn, you may not need anywhere near $1 million to retire comfortably. For instance, if you have $500,000 in your nest egg, that could be plenty for your situation. In the end, the amount of funds youll need for retirement is completely personal to you. If you have specific questions about your retirement plans, a financial advisor can help.
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