Calculating how much you’ll need to retire is a tricky process. You’ll want to look at your living expenses of course, which involves creating a budget. Those numbers are pretty easy to come up with. You’ll also want to put something aside for medical expenses. Not so simple.
The other piece of this is determining what your average rate of return on investment and retirement accounts will be. Then there’s the disbursement numbers, your retirement income. If you retire during a down market year, you may fall victim to sequence risk. Confused yet?
Don’t worry. We’re going to break all this down for you. The short answer to the question “can I retire at 60 with 500K?” is, “Yes, you can retire on $500K.” 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
The average monthly social security benefits payout is $1503 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 maximum available, you’ll have to wait until the full retirement age of 70.
Think about that for a moment. If you retire at 60, you’ll have to wait ten years before you can a collect your first social security check. You can settle for less if you begin at 62, but then you’re stuck with that amount for the rest of your life. 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 those first ten years. This is known as “semi-retirement.” It’s not a bad lifestyle. Part time employment keeps you busy and adds a few extra dollars to your wallet.
Live Comfortably, But Not Excessively
Five hundred grand is not a lot of money, but you can live comfortably in retirement with it 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 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 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 per month. 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 $46,097 from ages 65 to 74. From 75 years old, those expenditures go down to $35,873. That includes spending in the following categories:
- Health Care
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. 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 important too. Adding an investment account could make it even easier to retire on 500K. The stock market has an average annual return rate of over 10%, so a good 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 are diversified with bond funds. 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 capped 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 on $500K, you’ll need to take this step to get there. Doing it without stocks will take you over twenty years.
Adjusting Your Living Expenses Before Retirement
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.
In order 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 just 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 simply dry up some day. That said, there could be an adjustment at some point in the amount they are able to pay you. 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.
Yes, it is possible to retire on $500K. 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.