Can I retire with $500,000?

By John R. Berry, CFP? and Beth H. Watson, CFP?

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We all know that $1 million isn’t what it used to be.

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While an individual with that amount saved would have been incredibly wealthy 100 years ago, the purchasing power of a dollar has plummeted. Millionaires are more common today, living in normal neighborhoods and laboring in unglamorous jobs.?

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Though it’s quite a bit of money, half a million dollars isn’t what it used to be, either. Most financial planners recommend you save far more than $500,000 for retirement, but federal data show that most Americans are not on target to save even that much.

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Because the half-million mark is closer to reality for many, we are writing this article to demonstrate potential situations in which people in their 60s today might retire with that much money.

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A modest lifestyle helps

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Let’s start with what should be obvious: $500,000 in savings will go further if your expenses are lower.?

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Here’s a quick example. Meet Max and Veronica Wilson, both 65. The Wilsons live in Texas and want to travel around the U.S. and spend time with their family, most of whom live nearby.

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The Wilsons recently paid their last debt. They also qualify for property tax freezes due to their age, which protects them from one of Texas’s great expense uncertainties.?

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With a $6,000 monthly budget, Max and Veronica are considered “lower-middle class” in their area. Max works for a regional manufacturer making $25/hour, and Veronica is a teacher.?

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The couple will make about $3,500 monthly with Veronica’s teacher retirement and Max’s Social Security. To maintain their standard of living, the Wilsons’ investments must provide $2,500 a month.

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Textbook rules of thumb suggest that $1,600 a month is a safer withdrawal amount, but every situation differs. So long as they’re prudent, the Wilsons could enjoy a confident retirement for many years.?

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Our team would suggest an expense review and some soul-searching about whether the couple could make any tweaks to their plan. Their expenses are already low, so a reasonable option might be for Max and Veronica to dial back their working hours so they could start enjoying their golden years, but not retire completely–holding off on portfolio withdrawals as long as possible.

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Upper-middle class lifestyle

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Now let’s cover a scenario in which $500,000 in retirement savings likely will fall far short without substantial change.

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A nice suburb in our area boasts a household income of over $140,000, about twice the Texas average. While it’s difficult to pinpoint retirement savings by zip code, characteristics of the town–including average home price, lot size, and property tax levy–make it the type of place where it would be difficult to thrive on a middle-income budget.?

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Take James and Anna Farleigh. They are 62 and relocated to the community 20 years ago for the good schools. Combined, they earn $175,000 a year. After taxes, benefit deductions, and retirement savings, they spend about $9,000 a month.

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The Farleighs paid off their home last year. Their debts are two car payments and student loans in Anna’s name, which they agreed to pay off for their son.?

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James and Anna are doing better than average with retirement savings. They started around age 30 and have amassed a $500,000 nest egg. Their projected nest egg at age 65 is $680,000.

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At age 65, the couple will make $5,000 a month in Social Security. To maintain their existing standard of living, their investments must provide $4,000 a month.

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Unfortunately, the Farleighs would need closer to $1 million at 65 to cover their lifestyle. Going from $500,000 to $1 million in 3 years is an uphill proposition even with ideal conditions.?

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Higher basic living expenses mean you must save more to maintain the same lifestyle.?

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A note on account type

In the examples above, we ignore whether the funds were in pre-tax or Roth retirement accounts. Money in pre-tax accounts will be taxed the year of withdrawal, while Roth money has already been taxed.

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If you are at least 59? years old, a $10,000 withdrawal from a Roth account will give you $10,000 in retirement spending. A $10,000 withdrawal from a traditional IRA or 401(k) will provide less, because Uncle Sam hasn’t been paid yet on those dollars.

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Wrapping up

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As the years pass, our dollars buy even less. Retiring on a $500,000 nest egg–possible today under the right circumstances–will become more difficult.

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Even now, most middle and certainly upper-middle-income earners close to retirement age should aim for a much larger nest egg.?

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Most younger people will need more.

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Often, clients and prospective clients feel behind on saving for retirement. Regardless of where you are in your financial independence journey, despair isn’t productive.

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What is helpful is taking time to reflect on your goals and values. You may face hard choices. Retirees we see “making it” with smaller nest eggs often make some of these choices:

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●?? ?Part-time work?

●?? ?Downsizing?

●?? ?Watching spending carefully

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If retirement is now on your radar, here’s a tip: The quicker you make improvements, the more effective they usually are. Our formal financial planning process can help determine whether you’re on track, or if specific changes would boost your opportunity for a meaningful retirement.

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Such common improvements–designed with the goal of helping you save more–might include:

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●?? ?Downsizing earlier than planned

●?? ?Re-evaluating your expenses

●?? ?Choosing not to pay for children’s college

●?? ?Consider working longer

●?? ?Shift spending to investing

●?? ?Change jobs if you don’t like yours, so you might be more open to working longer

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If you are open to more radical change–easier for the young!--you might investigate frugal living tips or minimalist lifestyles online.?

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Every retirement plan we see is unique. More money can help to provide freedom and enjoyment, especially if your lifestyle needs and means are in harmony.

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If you would like to discuss your retirement strategy, please schedule a call today!