Planning for retirement is largely a numbers game. Many experts recommend saving at least $1 million for retirement, but that doesn’t take your individual goals, needs or spending habits into account. It may also seem intimidating considering that nearly half of all American households don’t have any retirement savings at all. Though it’s different for everyone, you could probably live comfortably through your golden years with less. Find out whether you could retire on $500,000 and how to make it happen below.
What Does the Typical Retirement Cost?
According to the Bureau of Labor Statistics, the average senior spends just over $49,000 per year. Assuming a 20-year retirement, the total cost would come to $980,000. So the $1 million mark doesn’t seem too far off.
A big chunk of that spending is related to healthcare. According to Fidelity Investments, the average 65-year-old couple can expect to spend $285,000 for medical expenses. And that figure doesn’t include long-term care costs for retirees who require assisted living services or in-home health care. Insurance firm Genworth estimates the annual cost for nursing home care in a private room topped $100,000.
While Medicaid can cover long-term care expenses, Medicare does not. And qualifying for Medicaid may require retirees to spend down their retirement assets to become income-eligible. Social Security benefits can help supplement retirement savings but they will only go so far. For 2019, the maximum Social Security benefit is $2,861 but the average monthly benefit is $1,461.
Crunching the numbers, the idea of retiring on $500,000 may seem out of reach. But don’t count it out completely. You’ll just need to estimate accurately and manage your living expenses, both before and after retirement, to make it happen.
How to Retire on $500,000
Creating a mock-up retirement budget can reveal if your $500,000 target is realistic based on the type of lifestyle you plan to enjoy. The budget should account for basic living expenses including housing, food, utilities and transportation, as well as health care, hobbies and travel.
If you have no idea where to begin, review your current spending patterns. Try tracking your spending for at least six months and then ask yourself some key questions, such as:
- Is what you’re spending now likely similar to what you’ll spend in retirement?
- Are there any expenses you have now that may increase or decrease when you retire? Any that could disappear altogether?
- Are there expense categories you don’t have now that you might add to your budget when you retire?
These questions will provide insight into what it will cost to maintain your standard of living in retirement and help you decide a realistic draw down rate. Typically, experts recommend withdrawing 4% of your retirement assets or less each year to ensure the money lasts. Assuming you have $500,000 in retirement, you could realistically withdraw $20,000 your first year of retirement. That amount would shrink incrementally each subsequent year, assuming zero portfolio growth.
If you take that $20,000 and add in the average retirement benefit of $1,461 from Social Security, that brings your total annual income up to around $37,000. That’s assuming, however, that you wait until your full retirement age to claim Social Security benefits. Taking Social Security at age 62 would reduce your benefit amount, while delaying benefits until age 70 would increase your payout.
Consider a Change of Location
If your estimated retirement budget exceeds your expected retirement income, you may consider relocating to a smaller space or more affordable area to reduce expenses. When evaluating budget-friendly retirement spots, consider:
- Median housing costs
- Cost of renting vs. buying
- Median health care costs
- Access to health care
- Crime rate
- Recreation and amenities
- Location, weather and climate
Living in a small beach town, for instance, could save you money but it may create headaches if it’s in an area that’s prone to hurricanes. A city might have stellar access to healthcare but very little in the way of things to do or opportunities to connect with other retirees.
Alternately, you might look into retiring aboard a cruise ship or heading overseas. Malaysia, Panama and Slovenia and consistently rank among the cheapest places to retire, while enabling you to soak up a new culture. But if you’re planning an overseas retirement, be sure to do your research. In addition to considering the cost of living, check any legal requirements for establishing residency in your chosen country. Weigh your options for healthcare and look into potential tax implications associated with claiming Social Security benefits or withdrawing money from investment accounts from afar.
Save Early and Often
The most important thing you can do if retiring on $500,000 is your goal is to be proactive about saving and investing. The sooner you begin saving, the longer you have to take advantage of compounding interest.
Start with your employer’s retirement plan if available. At a minimum, contribute enough to get the full company match. Aim to increase contributions up to the annual maximum allowed. If you’re able to max out your plan, supplement your retirement savings with a traditional or Roth IRA. Traditional IRAs allow for tax-deductible contributions while a Roth IRA affords tax-free withdrawals in retirement.
A Health Savings Account can help you prepare for future health care expenses on a tax-advantaged basis. These accounts, associated with high deductible health plans, allow you to deduct contributions, up to the annual limit. Those contributions grow tax-deferred and withdrawals are tax-free when used for qualified healthcare expenses. At age 65, you can begin taking funds from an HSA penalty-free for any reason. You’ll pay income tax on the distributions but it could be an added income stream if you remain healthy in retirement.
Take advantage of unexpected savings opportunities as well. If you get a raise, for example, divert those extra funds to your 401(k) or IRA. Do the same with tax refunds, bonuses and any other windfalls you receive. Those extra funds can add up over time, getting you closer to your $500,000 retirement savings goal.
The Bottom Line
Retiring on $500,000 may be possible, but it probably won’t be easy. In addition to aggressive saving and strategic investing, you’ll need to be honest about your needs and thoughtful with your spending. It will be easier if you’re debt-free, healthy and don’t anticipate major expenses will arise during your golden years. Downsizing, moving somewhere with a low cost of living and committing to a modest lifestyle can also help. And remember that professional advice typically goes a long way when it comes to long-term planning.
Tips for Planning a $500,000 Retirement
- Use calculators to your advantage. A retirement calculator and Social Security calculator to estimate how much money you’ll need and what you’ll have coming in for retirement. Update the numbers whenever you experience a major life change that can affect your finances, such as getting married, having a child or changing jobs.
- A financial advisor can help you develop a saving and investment strategy that ensures you will be financially secure in retirement. If you haven’t found the right advisor for you, try SmartAsset’s free tool. It matches users with financial advisors in their area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/DaLiu, ©iStock.com/DragonImages, ©iStock.com/Sitthiphong