Can I retire at 60 with 500k?
This is the question most people considering early retirement ask. Unfortunately, calculating how much income you’ll need to retire is a tricky process. You’ll want to look at your annual living expenses, of course, which involves creating a budget.
Those numbers are pretty easy to come up with. But, you’ll also want to save extra money for medical expenses. Not so simple, right?
The other piece of this is determining your average rate of return on investment and retirement accounts. Then there’s the disbursement numbers, your retirement or pension income. If you retire during a down-market year, you may fall victim to sequence risk. Are you confused yet?
Don’t worry. We’re going to break all this down for you. So the short answer to the question “can I retire at 60 with 500K?” is yes. So you worry about getting your half a million together, and we’ll walk you through how to make it work for you.
To Retire You’ll Need Social Security Benefits
Let’s look at retirement income projections based on your social security benefit.
The average monthly social security benefits payout is $1,503 per month. The maximum you can get is $34,000 a year, which would be nice, but let’s assume you’ll be collecting an average check. To get the full social security benefits, you’ll have to wait until the full retirement age of 70.
Think about that for a moment. If you retire at 60 with 500K, you’ll have to wait ten years before you can collect your first social security check. You can settle for less if you begin at 62, but then you’re stuck with that amount as your social security income for the rest of your life. So, it’s better to wait.
To preserve retirement savings, like 401(k) or Roth IRA accounts, many early retirees continue to work part-time in the first ten years. This is known as “semi-retirement.” It’s not a bad lifestyle. Part-time employment keeps you busy and adds more money to your wallet.
Live Comfortably, But Not Excessively
Five hundred grand is not a lot of money, and you can retire comfortably with it, and live the life you want as long as you spend moderately. Look for specials at restaurants and while traveling. Enjoy free activities, like walking along the beach or reading in the park.
Using an online calculator, we did the math on retiring at sixty and still having a sizeable retirement income. So suppose you retire with a $500K retirement savings account gaining 6.5% per year. The average rate of return is 5-8%, so we picked the number in the middle. Assuming 3% inflation, that gives you the bandwidth to withdraw $26K per year.
Add that $26K to the 18K you can get from social security and you’re looking at $44K per year or a little over $3600 as your monthly income. Can you live on that? If you plan carefully before retirement, it should be doable. If you have a partner, you can almost live extravagantly.
Creating A Spending Budget For Retirement
According to the Bureau of Labor Statistics (BLS), the average American has annual expenditures of $48,885 from ages 65 to 74. From 75 years old, those expenditures go down to $36,673. That includes spending in the following categories:
- Food
- Housing
- Clothing
- Transportation
- Health Care
- Entertainment
- Other/Miscellaneous
Those numbers don’t include additional contributions to retirement accounts or pension funds, which are often done well into a person’s seventies. That money comes back to you with interest, so technically it’s not an expense.
Based on our math above, you’ll have $44K a year for thirty years, including social security income. That leaves you a little short in the first few years, so you’ll have to either cut expenses or work a part-time job for additional retirement income. Consider that part of your retirement plan.
Investment Accounts To Boost Retirement Savings
Retirement planning is more than just contributing to the company 401(k) or IRA if you’re self-employed. Investing for retirement is essential too. Adding an investment account could make it even easier to retire at 60 with 500K. In addition, the stock market has an average annual return rate of over 10%, so that a reasonable investor can do well.
Why does a stock market portfolio have a higher return than a retirement fund? 401(k)s, IRAs, and pension funds generally utilize asset allocations that are ideal for retirement. These accounts are generally diversified with bond funds, ETFs for retirement, and safer stocks. They produce a lower annual yield, but they are considered a “safer” investment. That may be true, but you lose 4-5% on that money.
Another reason to open an investment portfolio is the limits imposed by the IRS on retirement fund contributions. 401(k)s contributions are capped at $19,500 per year. IRAs, both traditional and Roth, are limited at $6000 per year, $7000 if you’re over fifty.
Investment portfolios have no limits. You can hire a financial advisor to manage them for you or do it yourself and save the fees. If you’re behind on your goal to retire at 60 with $500K, you’ll need to take this step to get there. Doing it without stocks will take you over twenty years.
It is always advisable to have a nest egg to fall back on. To make the best investment, hire a certified financial planner to help you come up with the best investment strategy.
Adjusting Your Living Expenses Before Retirement
As you approach your retirement age, you need to adjust your spending habits and living expenses. Selling the house and buying a small condo or cottage on the beach will reduce your living expenses and give you a more comfortable retirement.
If you don’t own property, buy a condo. It’s cheaper to pay a mortgage than a rent payment, and the fees will cover maintenance.
To stretch your available resources throughout your years of retirement, you’ll need to set up a withdrawal rate that covers everything. Housing is a scenario you should evaluate early. Health insurance is another. Make sure you’re covered for both.
You can’t simply earn back what you spend in retirement. It’s called a fixed income for a reason. Sure, you can work part-time for a while, but eventually, you’ll want to enjoy the fruits of your labor. Careful savings and budgeting will give you the ability to do that.
Unexpected Adjustments To Retirement Income
Despite warnings about social security insolvency, it’s unlikely that the social security fund will dry up someday. That said, there could be an adjustment at some point in the amount they can pay you. So try not to rely on it too much.
Another issue to be concerned about is sequence risk. If you retire during a down-market year and don’t adjust your withdrawal rate accordingly, you’ll consume the principal of your retirement savings too quickly. A good rule of thumb is to wait for a bull market.
Other Things To Consider in Your Retirement Planning
There are several other things to consider when planning an early retirement with 500k. One of them is paying off your debt.
In retirement planning, you need to pay off your high-interest debts, especially those of credit cards. If you have any outstanding credit card balances, pay them off, so you don’t use your retirement assets for it. Your retirement income will thank you for it.
Debt payment also boosts your credit score and lowers your credit realization rate. The better your credit score, the easier it is to refinance your mortgage or get a new home if you plan to downsize to save money.
Do You Pay Taxes When You Retire?
Most people who retire early have a financial plan. They create a tight budget, consider their spending power, personal finance, investment portfolio, and social security payments.
If they plan to keep working, they consider how much income they will bring in and its impact on their lifestyle. But one thing most people planning an early retirement fail to consider is how much of the revenue will get taxed.
If you’re wondering if retirees pay tax, the answer is yes, and you should not owe taxes. Several factors determine how much of your income will get taxed. They include:
- Your filing status
- The source of your retirement income, and
- The total amount you received each year.
In addition, note the following:
- 85% of your social security benefits many be taxed depending on you total income and total status
- Distributions from 401(k) and traditional IRA accounts are taxable
- Distributions from Roth IRAs are tax free
Should You Hire a Financial Advisor?
Your life expectancy, the rising cost of living, market downturns, and the number of family members depending on you contribute to the type of life you live at retirement. While we’ve established you can retire at 60 with 500k and have shown you ways to make it work; you may still find yourself struggling. So, why not seek professional advice?
This is where financial advisors come in. Financial advisors or financial planners offer investment advisory services. In addition, they help you make decisions regarding wealth management and personal finance.
If they specialize in retirement planning, they will create a retirement plan that works for you and will help you save as much money as you desire. Before hiring a financial advisor, ensure they are industry certified, especially by the Certified Financial Planning Board in the United States.
Yes, it is possible to retire on $500K. However, if you do it at 60, you’ll need to stretch your retirement savings out for 30 years, at least. That’s an okay plan, but if you put a few more years in, you’ll find that life in your seventies is pretty good.
