Our team tries to analyze retirement scenarios for people of all income levels who have a variety of retirement wishes. While some people wish for yachts and caviar, others just want a tranquil life of simple pleasures and the absolute necessities. Today we huddled and did some research on a comment to another post which we felt was worth following up on with a full blog entry. The question posted was: can I retire at age 60 with $500,000?
Part of the research was spent deciphering an article on Approach Financial written by Justin Pritchard, CFP®, MBA, PPC®, who is located in Montrose, Colorado.
Is Retiring on $500,000 Doable?
When the topic of retirement is brought up, people have mixed opinions on what it takes to comfortably retire. You’ll hear some people go with the round numbers like one or two million dollars, and you’ll hear others talk about what inflation could do to the economy and cite that they need far more than those numbers.
More than anything, before you can even take a stab at what you need to retire, you need to sit down and look at your monthly spending and any income you’ll have available to you at various points in life. Will your lifestyle continue to be the same, or will you scale it down and live more simple? Or, are you looking to enjoy your golden years and need more money to do it the way you always dreamed of?
Those decisions are all up to you, but for the sake of education, today we’re going to lean on research that shows you can retire with $500,000.
Retiring on $500,000 may be possible, but it probably won’t be easy.
Rebecca Lake – Smart Asset
How to Retire With Only $500,000
You’ll have to have some sort of retirement income, as well as a low monthly number of fixed expenses. This is very important, because without these components, you are losing the ability to retire with $500,000. Things get easier if you have a dual income or pension from Social Security.
The first thing you’ll need to do to find out if this will work for you is to examine how much money you need to spend each year to keep the lights on, keep you fed, and go about your life. Once that number is determined, you can have a closer look at the resources available to you to see if you can indeed support that spend.
Examining Your Spending Habits and Needs
This is by far the most crucial point of looking at your retirement and knowing what you can retire on, no matter what amount you have in mind. It becomes much easier to retire when you have a smaller financial obligation and can withdraw less money from your retirement savings in comparison to someone who may have luxury items that require capital, such as a vacation home, motor home, boat, or other “toy.” The more you can slim down the monthly nut required to run your life comfortably, the less money you’ll need for retirement. However, it’s important that you aren’t a penny pincher in the process of making this work because life throws us all sorts of surprises like natural disasters, pandemics, and emergency medical bills, so make sure to give yourself some wiggle room.
The best way to examine your spending habits is to go through your bank statements and document everything. There are even apps that can help you where you spend your money. Determining a number that you spend each year is very important.
Pritchard suggests you closely examine three items:
#1: Your Actual Budget
This is what you are spending currently. Adjust this for any major changes such as paying off your house when you retire.
#2: Income Replacement Method
Find a percentage of your income that you feel you need at retirement age. This number may not be 100% for many reasons, such as downsizing a home, ceasing to contribute to retirement accounts, and payroll tax obligations.
#3: Lifestyle Estimate
Find a number you can live on. This number is different for everyone and there isn’t a stock answer. Some people will find it’s impossible to retire on $500,000 when they examine their spending habits.
Make sure to look at all of these items as retiring on $500,000 isn’t easy and it leaves very little room for making mistakes, so spend time on this process when determining your number. After you determine your number, you have to figure out what your goal is and then go out and do what it takes to achieve that goal.
Look at your retirement income. Do you get a pension? Do you have a 401k? Or are you planning on living on social security benefits?
Many people will make ends meet by depending on social security benefits. Your social security benefits will vary depending on your income over the years, and some people will get over $34,000 per year, but if you delay these benefits past your full retirement age, you’ll receive more money each year.
Government pensions are perhaps the most known, as well as lucrative plans out there, but some private employers will offer them as well. A pension income is a monthly income that will start coming in when your normal wages are gone because you stopped working. A lucrative pension plan is something many people desire when they take on certain careers, and later in life they are rewarded as these pensions can cover a lot of their monthly expenses, therefore making it possible for them to retire on $500,000 savings.
There remain many opportunities to earn money during retirement. I have friends who earn income from royalties, deals that pay them yearly throughout the long term versus a one time payout, and even rental income. Of course, sometimes having a side hustle can go a long way towards helping you make retiring with $500,000 work as well.
Can You Really Retire on $500,000?
Your answer is unique to you, and it’s encouraged to discuss this with a Financial Advisor. They can help guide you as you make decisions about where to draw money from and the potential tax implications that may have. They also are in the best position to understand your spending and savings habits and normally heed on the side of caution when advising clients on money matters, so it’s very important you discuss your goals and plans at least on an annual basis.
For me, the question has always been this:
What is the Best Type of Life in Retirement?
For me, my goal in retirement is to live life the same way I live it today.
I have the goal to travel the world and do frequent stay-cations throughout my home base, (Florida) as well a return to my home State of Minnesota as often as I do now. In fact, I even want to invest in a lake front property and spend the Summers there. Fortunately, my job allows me to do this right now and for this reason, I don’t see any reason to change things. I’ll continue to save money and put it into my self directed IRA account so I can use that investment vehicle to invest in alternative assets that traditional retirement accounts didn’t allow me to tap into.
For me, retiring at 60 with $500,000 would mean that I have all of my properties paid off, and even so, real estate taxes and incidentals add up. Unless I have passive income from a business endeavor, I don’t see myself retiring on $500,000 in cash. I am an Entrepreneur and always aim high and like to enjoy the fruits of my labor, so your mileage may vary. I know plenty of people that could easily make $500,000 work, and if that is your goal, hopefully today’s information gave you some insight on how you can make that a reality.
Good luck and happy saving!