7.5 MIN READ
When people talk about retirement, they often quote round numbers and rules of thumb. For example, you might hear somebody say that you need $2 million to retire (or more). But the real amount you need depends on circumstances like your spending and other sources of income. So, here’s how it looks to retire on $500k.
Not everybody is going to save several million dollars during their working lives. At some point, you may face a choice: Do you work longer to accumulate more savings, or can you retire with less?
Yes, You Can Retire on $500k
The short answer is yes—$500,000 is sufficient for some retirees. The question is how that will work out, and what the conditions need to be for this to work well for you. With retirement income, relatively low spending, and some good fortune, this is feasible. If you have two people in your household receiving Social Security or pension income, it’s even easier.
Clearly, more money results in more security and more options. But when you’re ready (or forced) to stop working, it’s smart to check the numbers and see what your options are. The key is to understand roughly how much you need to spend each year, and determine if you have the resources to support that spending.
Let’s walk through an example of exactly how that works.
Keep reading below, or listen to an explanation by video:
Your Spending Level
One of the most critical pieces of a 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—well before traditional “retirement age.”
The goal here isn’t to spend as little as possible and suffer through your golden years watching every penny. You need to be comfortable, and surprises (such as healthcare events) cost money. But if you’ve developed the habit of keeping your spending relatively low, you may be able to make this work.
How much will you spend? One way or another, you need to estimate how much you’ll spend each year. There are several ways to determine your retirement spending need, which we can summarize as:
- Actual budget: Use your current spending level, 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 may be less than 100% because you’ll stop saving for retirement and paying payroll taxes.
- 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 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 look at 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 figure out what it takes to reach that goal.
You probably have at least one source of retirement income that will cover a portion of your spending needs.
90% of people age 65 and over receive Social Security benefits, and 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 $1,503 per month, or about $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—or more, if you wait beyond your Full Retirement Age. Delaying your benefits typically provides a raise 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 a variety of factors, those pension benefits can be quite generous. In some cases, the income might cover all of your monthly expenses, minimizing the need to tap into your $500k of retirement savings.
Other Sources of Income
The possibilities here are endless, but any other sources of income help 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?
Let’s 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 Income?
Some people imagine retirement as a period where they “live off the income” from their savings. But for most people, that’s not a reality. Especially if you plan to retire with $500k in assets, you (like most people), will probably need to spend down your assets.
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 most 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 numerous factors (including some good fortune—there are no guarantees in life, and it could fail), and the topic has been debated, but it stands up reasonably well as a starting point for retirement income.
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, consider 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 the amount you have saved by 0.04.
The goal is to have your purchasing power keep up with rising prices.
Again, there’s no guarantee that the strategy will work, and multiple factors affect your likelihood of success. That means picking the right investment strategy, and possibly being willing to reduce withdrawals temporarily during market downturns, among other things.
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, just to keep it simple)
That leaves you short by about $2,000 per year, if you’re hoping to retire on $500k. Plus, you’ll owe taxes on your $20,000 of withdrawals, which we’re not going to address right 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 their spending. 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 important 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 accumulate more, allowing you to retire on more than $500k.
- Increase retirement income benefits: Extra working years might lead to a higher pension or Social Security benefit. Those calculations often reward you for extra years late in life. As a result, you narrow the gap between your retirement income and your spending need.
- Shorten your withdrawal period: A 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.
- Taper down: If possible, you can work less. That allows you to reduce your retirement need while providing time to do what matters most.
Withdraw more: Using our example, you could take your chances and withdraw the extra $2,000 per year. This results in a 4.4% withdrawal rate on your $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 spending in response to market crashes.
Consider safety nets: Generally, using your home equity to fund retirement is 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. Whether you use a home equity loan or a reverse mortgage, you may have additional assets.
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 only need to withdraw 4.1% of your savings each year to make the numbers work.
There are several other approaches, including trying to earn more on your investments, but that requires some good fortune (and it can end up badly). The point here isn’t to show you every possible way to retire on $500k, but instead, to demonstrate that it’s possible and show how it might look.
Planning is Critical
With proper planning, it’s possible to retire with almost any level of assets. To make it 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.
About the Author
Justin Pritchard, CFP® is a financial advisor with over 15 years of experience helping people with retirement. He's based in the small town of Montrose, Colorado, and he works with clients nationwide. When he's not working on somebody's retirement plan, he likes to ride his bike and ski.
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