By Justin Pritchard, CFP® in Montrose, CO
There’s a lot of talk about how much you need to retire. For example, you might hear that you need $2 million (or more) to retire. People like round numbers and rules of thumb, but the amount you need really depends on things like your monthly spending and income sources.
Most people never reach $1 million in savings. In fact, many of my clients have somewhere between a few hundred thousand to a few million in assets. Yet, they manage to retire comfortably. So, with these modest levels in mind, let’s see how it looks to retire on $500k.
Ultimately, anybody approaching retirement faces a choice: Do you work longer so you can continue saving, or can you retire with less?
Yes, $500k Might Be Enough
The short answer is yes—$500,000 is sufficient for many retirees. The question is how that will work out for you. With an income source like Social Security, relatively low spending, and a bit of good luck, this is feasible. And when you have two people in your household receiving Social Security or pension income, it’s even easier.
Clearly, more money provides more security and more options. But when you’re ready (or forced) to stop working, it’s smart to run some numbers and explore options. And an important first step is to understand roughly how much you need to spend each year. Then, you can figure out if you have the resources to support that spending.
Let’s walk through an example of exactly how it works.
Keep reading below, or listen to an explanation by video:
Your Spending Level
A critical piece of any retirement plan is the amount you spend each year. The less, the better, when it comes to financial planning calculations. I’ve worked with clients who withdraw less than $2,000 per month from their retirement savings, and that lifestyle allowed them to retire comfortably—long before a traditional “retirement age.”
The goal here isn’t to spend as little as possible and suffer through life watching every penny. You need to be comfortable, and surprises (such as healthcare events) cost money. But if you’ve formed the habit of keeping your spending relatively low, you may be in good shape.
Quick Retirement Calculator
How much will you spend? The first step is to estimate how much you’ll spend each year. Here are three options for estimating your retirement spending need:
- Actual budget: Use your current spending, and adjust for any changes (such as a paid-off home at retirement).
- Income replacement method: Pick a percentage of your current income, such as 80%, that you need to maintain throughout retirement. It might be less than 100% because you’ll stop saving for retirement, and you won’t have payroll taxes after you stop working.
- Lifestyle estimate: Choose a round number, such as $50,000 or $100,000 per year, that you think you need. This method is somewhat dangerous, though, because people tend to estimate high (which makes sense, and is better than picking a number that’s too low!).
Each of those methods has pros and cons, so it’s wise to try more than one to see if you’re missing anything. Retiring on $500k does not leave most people with significant room for error, so take your time with this process. Once you have a reasonable number in mind, you know what your goal is.
Next, we find out what it takes to reach that goal.
You probably have at least one source of retirement income that covers a portion of your spending needs.
90% of people age 65 and over receive Social Security benefits. For at least half of them, Social Security makes up 50% or more of their household income. That makes your Social Security payment a critical piece of your plan. The average Social Security benefit in retirement is just over $1,500 per month (or $18,000 per year).
If you’ve been fortunate enough to have high earnings during your working years, you might receive as much as $34,000 per year. It could be more if you wait beyond your Full Retirement Age (FRA). Delaying your benefits typically provides an 8% annual increase until you reach Age 70.
Pensions are still a thing for people retiring today. You might get income from a private employer, the federal government, a state-run pension, or another organization. That money comes in monthly, replacing your regular wages once you stop working. Depending on your income and work record, pension benefits can be generous. In some cases, the income might cover all of your monthly expenses, minimizing the need to tap into your retirement savings.
Other Sources of Income
The possibilities here are endless, but any other sources of income reduce the amount you need to save for retirement. Those might include royalties, consulting or part-time work, rental income, and more.
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 everybody’s 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 (2020).
Example: Assume you want to retire on $500k of assets in your IRA, 401(k), 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.
Spending From Your Assets
To close the gap between the income you need and the income you have, you’ll 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, that’s not a reality. Especially if you plan to retire with $500k in assets, you will probably need to spend down your assets. That’s 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 longer—which isn’t always an option. The other option is to save so much of your income that it’s hard to enjoy yourself and make memories during your working years. That’s probably not very appealing, either.
A “Safe” Withdrawal Rate?
It’s critical to make your money last. You don’t want to run out of savings before you die, as you’d need to make unwelcome sacrifices at a time in life when you’re 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 (including some good fortune—there are no guarantees in life, and it could fail), and the topic is constantly debated. Still, the 4% rule can be helpful as a starting point for learning where you stand.
Tip: If you want to be safe, use a lower number, such as 3%. Recent studies suggested a 3.3% rate might be appropriate when interest rates are low and markets are near all-time highs. Note that when I work with clients, we don’t start with a withdrawal rate. Instead, we look at spending needs and we can check on the withdrawal rate later.
If you retire with $500k in assets, the 4% rule says that you should be able to withdraw $20,000 per year for a 30-year (or longer) retirement. So, if you retire at 60, the money should ideally last through age 90. If 4% sounds too low to you, remember that you’ll take an income that increases with inflation. If inflation is 2% per year, you’d withdraw $40,800 in your second year, $41,616 in the third year, and so on.
To calculate your 4% amount for Year 1, multiply your retirement savings by 0.04 or use the tool below.
The goal is to have your spending power keep up with rising prices.
Again, there’s no guarantee that the strategy will work, and multiple factors affect your success. That means picking the right investment strategy, and possibly being willing to reduce withdrawals temporarily during market downturns, among other things.
- “Take your temperature” with this risk questionnaire developed by psychologists. Just going through the questions may be enlightening.
Are We There, Yet?
So far, you have:
- $30,000 of income from Social Security and pensions
- $20,000 of withdrawals from your $500k in assets—ignoring taxes, to keep it simple, but you may pay taxes in retirement (YouTube video)
That leaves you short by about $2,000 per year. Plus, you might owe taxes on your $20,000 of withdrawals, which we’re ignoring for now. However, if you assume taxes of roughly 15%, that’s an additional $3,000 per year you need to budget for.
So, what can you do?
The first thing most people think of is cutting costs in retirement. That’s also the most difficult. If you can snap your fingers and spend $2,000 less each year, that’s great—problem solved.
How to Fix a Retirement Shortfall (Things You’d Rather Not Do)
Besides cutting your spending, there are several other ways to close the gap. None of them are ideal, but it’s smart to know your options in case you find yourself with expectations that can’t be fulfilled (yet). Several tips to help you retire are below.
Work longer: From the category of Least Popular Solutions, you can work longer. Doing so is surprisingly powerful:
- Builds up savings: That time allows you to contribute more to your retirement savings, allowing you to retire with a bigger nest egg.
- Increase retirement income benefits: Extra time working might lead to a better pension or Social Security benefit. Those calculations often reward you for extra years of work late in life (partly because your income is typically at its highest), which can be particularly helpful for women. With that higher income, you narrow the gap between your retirement income and your spending need.
- Shorten your withdrawal period: An extra year working is one year less that you have to pay for out of your savings, which is why your retirement age matters so much. A shorter lifespan also helps to boost payouts from Social Security, pensions, and annuities.
- Taper down: If possible, you can work less instead of taking your income to zero. That enables you to reduce your retirement need while freeing up time to do what matters most.
Withdraw more: Using our example, you could take your chances and withdraw the extra $2,000 per year. The result would be a 4.4% withdrawal rate on $500,000 of savings. That’s a bit higher than the traditional 4% rule, but it’s not off the charts, and it could work—especially if you’re willing to adjust your withdrawals in response to market crashes.
Consider safety nets: Relying on home equity to fund retirement can be risky. But when there’s a substantial difference between what you have and what you need, it can make sense. Sometimes it’s smart to consider your home equity as a backup plan. If you face major medical expenses or other unexpected costs, that money can help you out of a tight spot. To access the funds, you might be able to use a home equity loan or a reverse mortgage, and each strategy has pros and cons.
Combine strategies: Cutting spending, working longer, or withdrawing more—on its own—may not solve your problem. It’s best to combine several different strategies. That way, the changes don’t need to be as drastic. For example, if you move to a slightly less expensive area and work part-time for an extra year or two, you might be able to make the numbers work.
There are several other approaches, including trying to earn more on your investments by taking bigger risks, but that requires some good luck (and it can end up badly). The point here isn’t to show you every possible way to retire with $500k in assets, but instead, to demonstrate that it’s possible and show how it might look.
Isn’t Your Financial Advisor Helping You With This?
This is exactly what a fiduciary financial planner is for—to figure this out with you (and for you). If you’re paying somebody who only manages your money or sells you products, it may be time for a change. Reach out if you’d like to talk—there’s no obligation, and we can just chat. I do not sell anything for a commission, I provide ongoing or one-time advice for clients, and I can work with people in Colorado and other states.
If you don’t yet work with a financial advisor, consider the benefits of doing so. You can spend your time and energy on other things, and an experienced professional can help guide you through life’s inevitable changes. Plus, a study from Schwab Modern Wealth showed that having a plan can increase your retirement confidence and help you develop healthy financial behaviors:
- 56% of people with a written financial plan felt “very confident” about their goals
- Only 17% of respondents without a plan felt very confident
There are many ways to work with an advisor, and things may have changed since you last spoke to a financial planner. For example, it’s easier than ever to work with somebody for one-time financial planning or pay a flat fee for advice. It’s understandable if you’ve had bad experiences in the past, and there are still plenty of advisors out there who are painful to work with, but things are changing.
Planning is Critical
It’s possible to retire with almost any level of assets. To find out if it will work, figure out how much you need to spend, how much income you can count on, and what assets are available to spend from. Online tools and financial advisors can help. The sooner you start, the more you can do to improve your chances of success.
If you found this helpful, you would probably benefit from my free guide, Keys to Retirement Planning. It comes via email and includes a bonus handout, 6 Safest Investments. Get your copy here.
Want to talk about this more? To get answers to your questions, start with a short, no-obligation phone or video call. You can share what’s going on in your world and describe your questions. Then, we’ll talk about how I typically help people. If it makes sense to work together (ultimately, that’s your choice), we explore the next steps. Learn more about my services and pricing options so you can make a decision.