Yahoo Finance I have $500K in savings and want to retire right now — is it possible in America?
It’s a common belief that you need at least $1 million in savings to retire, but it’s possible to retire with less — and many people do. After all, the median amount that Americans aged 65-74 have in dedicated retirement accounts is only $200,000, according to the Federal Reserve.
So how can you retire with $500,000 or less? It’s possible, if you're willing to live on a strict budget and invest your nest egg wisely so that it provides you decent steady returns. It also helps if you retire later and you claim Social Security benefits at an age that maximizes your monthly benefit.
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You may need to be creative (and open-minded) about other potential income sources or ways to reduce expenses, such as downsizing to a smaller home.
You may also be interested in learning more about the Financial Independence, Retire Early (FIRE) movement.
Determine if you have enough
To decide if you can retire on a nest egg of $500,000, you’ll need to determine how much you plan to spend each month in retirement. Calculate your current spending and how you expect it to change when you retire. For instance, you could reduce your housing costs if you pay off your mortgage, but your medical costs could be higher if you have health problems.
A popular retirement guideline that may help you estimate how much you can spend in retirement with your current nest egg is the 4% rule. According to this rule, you should plan to withdraw 4% of your savings in the first year of retirement and adjust that amount for inflation every year after. For example, If you have $500,000 in savings, you would withdraw $20,000 in your first year and then, if inflation is 2%, withdraw $20,400 the next year. This is much lower than the average annual expenditure for Americans 65 and older, which was $57,818 in 2022.
The 4% rule assumes you retire with a balanced portfolio of 50% stocks and 50% bonds. It also includes taxes or investment fees in your withdrawal amount. Financial adviser William Bengen, who came up with this rule, said using this formula should allow your savings to last you 30 years.
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However, personal finance guru Suze Orman has called the 4% rule “dangerous” and suggests retirees aim to spend 3% of their savings each year instead.
Next, you’ll need to determine your total retirement income. Most Americans will be entitled to a monthly Social Security benefit, which averages $1,907 (as of January 2024). This equates to about $22,900 per year. You can estimate your own benefits by setting up a my Social Security account. You may also consider any other sources of income you'll have, like annuities and pensions.
Consider your options
What if the combination of retirement savings and Social Security is not enough to meet your expected expenses? Some options include retiring later, reducing your expenses, looking for other sources of income and possibly altering your investment strategy if you're willing to take on more risk.
When you retire is an important factor. It’s often assumed that your savings will last about 30 years (using the 4% rule), but this can vary depending on other factors like the returns you get from your portfolio, and you could have unexpected expenses that force you to withdraw more than 4% in a year.
In general, the later you retire, the more flexibility you'll have and the better your chances the money will last. Retiring later can also give you time to build up more savings and possibly increase your monthly Social Security benefit.
To reduce expenses, pay off your debts before you retire, consider downsizing your home and explore the possibility of relocating to a different city or even a different country with a lower cost of living.
Other sources of income that you might consider include a part-time job or rental income from renting out part of your home. Consider that if you make even $500 a month at a part-time job, it’s equivalent to withdrawing 4% from an additional $150,000 of savings. You might also want to consider cashing in insurance policies that have a cash value or borrowing against your home equity.
You’ll want to consult a financial adviser to ensure your portfolio is invested properly for your needs and risk tolerance, and that you withdraw in a way that minimizes taxes. A financial adviser could help you devise a strategy to comfortably retire with $500,000, or even less.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
