Can You Retire With $500,000: Yes, It's Possible - Examples and More (2024)

DoorJustin Pritchard, CFP®i Montrose, CO

Key learning points:

• Most people in the United States retire with less than $1 million.
• $500,000 is a healthy savings to supplement Social Security and other sources of income.
• Assuming a 4% withdrawal rate, $500,000 could produce $20,000 per year in inflation-adjusted income.
• The 4% "rule" is simplistic and you will probably use it differently.
• The amount you need dependsthings like your monthly expenses and sources of income.

Most never make it$1 million in savings. In fact, my clients typically have between a few hundred thousand and a few million in assets. Yet they manage to retreat comfortably. With these more realistic levels in mind, let's take a look at what it looks like to retire with $500,000.

Everyone who is nearing retirement ultimately faces a choice: do you work longer so you can continue to save, or are you already at the finish line?

Yes, $500,000 could be enough

The short answer is yes, $500,000 is enough for many retirees. The question is how it will work for you. This is possible with an income source such as social security, spending habits and a bit of luck. And if two people in your household receive Social Security or retirement income, it's even easier.

It is clear that more money means more security and more opportunities. But if you're ready (or forced) to quit work, it's smart to crunch some numbers and explore options. An important first step is to understand it roughlyhow much do you needto be used every year. Then you can check whether you have the resources to support that consumption.

Let's see an example of exactly how it works.

Read more below or listen to an explanationper video:

Your consumption level

A crucial part of any retirement plan is the amount you spend each year. Some clients withdraw less than $2,000 a month from their retirement savings, and that lifestyle allows them to retire comfortably — long before a traditional 'retirement age.”

The goal here is not to spend as little as possible and suffer through life watching every penny. You have to feel comfortable and surprises (such as healthcare arrangements) cost money. But if you've made a habit of keeping your consumption relatively low, you can be in good shape.

Quick pension calculator

How much do you want to spend?The first step is to estimate how much you want to spend annually. Here are three options to estimate yoursneed for pension expenditure:

• Actual budget:Use your current expenses and adjust for any changes (such as a paid-off home after retirement).
• Income Replacement Method:Choose a percentage of your current income, for example 80%, that you want to keep during your retirement. It may be less than 100% because you stop saving for your pension and you do not have to pay payroll tax when you stop working.
• Lifestyle Assessment:Choose a round number, for example$ 50.000of$100,000 per yearthat you think you need. However, this method is somewhat dangerous because people tend to estimate high (which makes sense and is better than choosing too low a number!).

Each of these methods has pros and cons, so it's wise to try more than one to see if you're missing anything. Retiring on $500,000 doesn't leave much room for error for most people, so take your time with this process. Once you have a reasonable number in mind, you'll know what your goal is.

We then look at what it takes to achieve that goal.

Retirement income

You probably have at least one source of retirement income that covers some of your spending needs.

Social Security

90% of people aged 65 and over receive social security benefits. Nastyat least halfof them, social security accounts for 50% or more of their family income. That makes your Social Security payment a crucial part of your plan. The average Social Security benefit at retirement is just over $1,900 per month (or $22,800 per year).

If you were fortunate enough to have high earnings during your working years, you could receive as much as $45,864 per year. It could be more if you wait until past your full retirement age (FRA). Delaying your benefits typically results in an 8% annual increase to younow 70 years old.

Retirement income

Pensions are still a thing for people retiring now. You may receive income from a private employer, the federal government, a state pension, or another organization. This money comes in monthly and replaces your regular salary if you stop working. Depending on your income and work, the pension benefits can be generous. In some cases, income can cover all of your monthly expenses, minimizing the need to tap your retirement savings.

Other sources of income

The possibilities are endless here, but all other sources of income reduce the amount you need to save for retirement. This can include royalties, consultancy or part-time work, rental income and more.

Where are you so far?

You can seeaverage pension savingsvaries by age, but everyone's situation is unique.

It is important that the average can be higher for people with large balances. To understand what the average person has in savings, the median may be more useful. The median is the middle result when you rank everyone from largest to smallest account balance.

Using this measure, we see that less than half of people in the United States have $500,000 in retirement savings. In fact, only half of those surveyed have more than $200,000 at age 65.

Average pension savings at age 65

Data source:From (2020).

Example:Let's say you want to retire with $500,000 in assets in your IRA, 401(k) and taxable accounts. You spend about $52,000 per year. Your Social Security benefits are $24,000 per year and you have a supplemental pension of $6,000 per year.

Subtotal:You have $30,000 in income per year and you need another $22,000.

Costs from your assets

To close the gap between the income you need and the income you have, you need to use your assets.

Can I live on the interest on $500,000?

Some people see retirement as a time when they 'live off the income' from their savings. But for most people that is not realistic.

Especially if you plan to retire with $500,000 in assets, you will likely need to use up your assets over time. Why? Interest rates tend to be relatively low, and most retirees avoid taking big risks with their savings.

For example, let's say you can get 5% interest with very little risk. Depending on when you read this, that may or may not be realistic. A 5% return on €500,000 is €25,000 per year. If you can make a living from that, fine, you can leave your director intact. But can you be sure that you will get the same (or more) interest from safe investments every year? That's quite a task.

If you need more income or if rates drop, something may need to change.

To save enough and avoid costs from your client, you may have to work longer – which is not always an option. Another approach is to save so much of your income that it is difficult to enjoy and make memories during your working years. It's probably not very attractive either.

You can also explore how to take more risks, although I don't recommend it. Investments that pay the highest dividends or offer unusually high interest rates often offer such high returns for a reason. They tend to be riskier than other investments available, so they have to pay more to compensate you for taking on additional risks. It's great when things go well. But that extra risk may (or may not) come back to bite you at some point.

For most of the population, including the clients I typically work with, depreciating assets over time is the preferred option.

A “safe” withdrawal rate?

It is important that your money is sustainable. You don't want to run out of savings before you die because you will have to make unwanted sacrifices at a vulnerable time in your life. So how much is "safe" to use? Arule of thumbsuggests you can use 4% of your savings per year. The success of that strategy depends on several factors (including a bit of luck – there are no guarantees in life and things can fail), and the topic is constantly debated. Still, the 4% rule can be useful as a starting point for learning where you stand.

Tip:If you want to be safe, use a lower number, such as 3%. Please note that when I work with clients, we do not start with a withdrawal rate. Instead, we look at spending needs and can check the payout percentage later.

If you retire with $500,000 in assets, the 4% rule says you should be able to withdraw $20,000 per year for a 30-year (or longer) retirement. So if you retire at age 60, the money should ideally last until you're 90. If 4% sounds too low to you, remember that you are assuming an income that increases with inflation. If inflation is 2% per year, you will withdraw €40,800 in the second year, €41,616 in the third year, and so on.

To calculate your 4% amount for year 1,multiply your pension savings by 0.04 or use the tool below.

The goal is to keep your purchasing power in step with rising prices.

Again, there is no guarantee that the strategy will work, and several factors will influence your success. This includes choosing the right investment strategy and possibly being willing to temporarily reduce payouts during market downturns.

• "Take your temperature".this risk questionnairedeveloped by psychologists. Just going through the questions can be illuminating.

Are we there yet?

So far you have:

• $30,000 in Social Security and pension income
• $20,000 in withdrawals from your $500,000 in assets – ignoring taxes, to keep it simple, but that's okaypaying taxes in retirement (YouTube video)

Then you have a deficit of approximately € 2,000 per year. Additionally, you may owe taxes on your $20,000 withdrawals, which we'll ignore for now. But if you assume taxes of about 15%, that's an extra budget of $3,000 per year.

So what can you do?

The first thing most people think of is cuttingcosts of pension. It's also the hardest. If you can snap your fingers and spend $2,000fewerevery year that's great – problem solved.

How to solve a pension shortfall (things you would rather not do)

In addition to reducing your consumption, there are several other ways to close the gap. Neither of these is ideal, but it is smart to know your options if you experience expectations that cannot (yet) be met. More tipsto help you retireis downstairs.

Save more:If you're short on time, it's probably best to add more money to your accountsefficient way to overtake. It's also one of the most difficult, and you may not have any additional cash flow available.

Working longer:You can continue working longer from the Least Popular Solutions category. This is surprisingly powerful:

• Build savings:That time gives you the opportunity to contribute more to your pension savings, so that you can retire with a larger savings pot.
• Increase retirement income:Extra working hours can lead to better pension or social security benefits. These calculations often reward you for additional years of work late in life (partly because your income is typically at its peak), which can be especiallyuseful for women. With the higher income you reduce the gap between your retirement income and your consumption needs.
• Shorten your reflection period:An extra year of work is one less year you have to pay for with your savings, and that's whyyour retirement agemeans so much. Shorter lifespans also help increase Social Security payments, pensions and annuities.
• Descending:If possible, work less instead of reducing your income to zero. This allows you to reduce your retirement needs while freeing up time for the most important things.

Record more:Using our example, you can take your chances and withdraw the extra $2,000 per year. The result would be a 4.4% withdrawal rate on $500,000 in savings. That's a bit higher than the traditional 4% rule, but it's off the charts and it could work, especially if you're willing to adjust your payouts in response to market crashes.

Think about safety nets:Relying on your own funds to finance your retirement can be risky. But if there's a significant difference between what you have and what you need, it might make sense. Sometimes it's smart to think of your home equity as a backup plan. If you have to deal with Majormedical expensesor other unexpected costs, that money can help you get out of a difficult situation. To access the money, you may be able to use a home equity loan or a reverse mortgage, and each strategy has pros and cons.

Combine strategies:Cutting back on expenses, working longer or taking more – alone – may not solve your problem. It is best to combine different strategies. This way the changes don't have to be so drastic. For example, if you move to a slightly cheaper area and work part-time for a year or two, you might be able to make the numbers work.

There are several other approaches, including trying to make more on your investments by taking bigger risks, but that takes a bit of luck (and can end badly). The point here is not to show you all the possible ways to retire with $500,000 in assets, but to demonstrate that it is possible and show what it could look like.

Is your financial advisor not helping you with this?

That's exactly what a financial planner is for: figuring this out with you (and for you). If you're paying someone just to manage your money or sell you products, it might be time for a change. Please contact us if you would like to talk. There is no obligation and we can just talk. I don't sell anything for a commission, I provide ongoing or one-time consulting to clients, and I can work with people in Colorado and other states.

If you are not yet working with a financial advisor, consider the benefits of this. You can spend your time and energy on other things, and an experienced professional can help you navigate life's inevitable changes. Additionally, a study from Schwab Modern Wealth found that having a plan can boost your retirement confidence and help you develop healthy financial behaviors:

• 56% of people with a written financial plan were “very confident” in 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 with a financial planner. This makes it easier than ever to work with someone for one-off financial planning or to pay a fixed rate for advice. It's understandable if you've had bad experiences in the past and there are still plenty of advisors who are difficult to work with, but things are changing.

Planning is crucial

It is possible to retire with almost any wealth level. To find out if it works, you need to figure out how much you need to spend, how much income you can count on, and what assets you can use.Online tools and financial advisorscan help. The sooner you start, the more you can do to increase your chances of success.

If you found this helpful, you'd probably benefit from my free guide,Keys to Retirement Planning. It is sent via email and includes a bonus distribution,6 safest investments.Order your copy here.

Would you like to talk more about this? To get your questions answered, start with a short, no-obligation telephone or video call. You can share what's happening in your world and describe your questions. Then we talk about how I normally help people. If it makes sense to work together (ultimately it's your choice), we'll explore next steps.Learn moreabout my services and pricing options so you can make a decision.