For some retirees in particular circumstances, $500,000 in retirement savings could last the length of a typical retirement and beyond, while for others in dissimilar situations, the same sum could be used up in just a few years. The difference depends on several factors, including lifestyle and spending habits, investment strategy and returns, age at retirement and inflation. Understanding these factors is key to understanding how long your savings will last in retirement. A financial advisor can help you develop a plan to fund a secure retirement.
Factors Affecting How Long $500,000 Lasts
How long $500,000 will last in retirement varies depending on a number of variables. For many people, it is likely to be adequate to fund a long, comfortable retirement while for others it might run short while memories of working for a living are still fresh. How long such a sum might last in your own retirement hinges on these considerations:
- Spending habits. The more you spend in retirement, the sooner your nest egg will run out. Lifestyle and location are major elements determining the adequacy of your retirement fund. Downsizing or moving to a less costly place can help.
- Investment strategy and returns. A conservative investment strategy or a poor market can depress investment returns, causing your nest egg to be drained more quickly by withdrawals. Carefully balancing risk and reward and avoiding withdrawals during down markets can make your savings has longer.
- Other sources of income. If you receive retirement benefits from Social Security or a pension or earn income from working part-time, you may not have to draw down your nest egg as much for living expenses. Delaying retirement until you are eligible for Social Security is an important consideration here.
- Healthcare costs. An unexpected illness or chronic condition can greatly increase your need for money in retirement. Again, delaying retirement until Medicare eligibility at age 65 can be a useful strategy.
- Inflation. If costs rise rapidly, especially if investment returns don’t keep up, you may need to spend more on basic expenses than you expected. Since you can’t control inflation, you may have to tighten your household budget in order to avoid emptying your retirement account sooner.
- If you can pay off debts such as auto loans, student loans and mortgages before retirement, it can help extend the viability of your retirement savings.
These are just some of the factors can influence long $500,000 could last in retirement. They and others can combine in innumerable ways so that every retirement situation is different.
Examples of Retiring With $500,000
To illustrate how these factors may affect each other and determine how long $500,000 will last in retirement, it can be useful to look at specific examples. Consider these two retiree couples in different situations.
The first couple retires in Boston, one of the most expensive cities to live in. They’re healthy, but are still paying on a mortgage and are not Medicare-eligible, so their budget has to cover private health insurance premiums. Overall, their annual expenses are $80,000. They employ a conservative investment strategy that generates a 5% annual yield from their $500,000 portfolio. They retire at 62, as soon as they are eligible for Social Security and get a combined $3,000 in monthly benefits without other sources of income.
Their $500,000 investment portfolio would generate $25,000 if left untouched. However, to cover their monthly expenses of $6,666, they’ll need to withdraw $3,666 each month to augment the $3,000 from Social Security. After a year, this will have reduced the nest egg to approximately $478,531. And after 16 years and 10 months, the $500,000 would dwindle away to nothing.
The second couple retires in St. Louis, one of the least costly cities. They work until full retirement age at 67, so their combined retirement benefits are $3,900, or 30% greater than the first couple despite having similar earnings records. Medicare provides affordable health insurance and they’ve paid off their mortgage and other debts, so their annual expenses are $60,000. They follow a balanced investment style and generate an average annual return of 7% on their portfolio.
In this situation, they will need to add $1,100 monthly from savings to their $3,900 from Social Security to cover their expenses. However, the 7% yield from their investments is significantly more than this. Assuming a constant yield and no unexpected expenses or inflation spikes, their $500,000 would never run out.
Conventional portfolio strategy doesn’t make such assumptions, because unpredictable events such as extended market downturns can cause even well-laid plans to go awry. However, the 4% strategy of withdrawing at an annual rate of 4% of the principal and adjusting it periodically to account for inflation is considered highly resilient. And this couple’s withdrawal rate is only a little more than 2.6%, suggesting that $500,000 in savings will last their lifetimes.
Bottom Line
How long $500,000 will last in retirement depends on a number of factors, including lifestyle, investment strategy and other sources of income. For many retirees with modest post-retirement spending plans, balanced investment strategies and full Social Security benefits, $500,000 may last the entire length of retirement. Retiring in a costly location, investing conservatively and having to pay for private health insurance are among factors that can cause $500,000 to run out before a typical retirement ends.
Tips on Retiring
- A financial advisor brings expertise and insight to your retirement needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free retirement calculator takes the mystery out of the key aspects of retirement finance, including Social Security, post-retirement budgeting and how much you’ll need to save monthly while still working
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