In simple terms, planning for retirement is 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. In turn, you may not need anywhere near $1 million to retire comfortably. For instance, if you have $500,000 in your nest egg, that could be plenty for your situation. In the end, the amount of funds you’ll need for retirement is completely personal to you. If you have specific questions about your retirement plans, a financial advisor can help.
What Does the Typical Retirement Cost?
According to the Bureau of Labor Statistics, the average senior spends almost $55,700 per year. Assuming a 20-year retirement, the total cost would come to $1.114 million. 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 around $300,000 for medical expenses over the rest of their life. 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 at about $105,000.
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 2021, the maximum Social Security benefit is $3,113, but the average monthly benefit is $1,544.
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 most recent average Social Security benefit of $1,544, that brings your total annual income up to around $38,500. 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 progressively delaying benefits until age 70 would increase your payout.
Consider Where You Want and Can Afford to Retire
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 for Retirement Early and Often
The most important thing you can do if aiming to retire on $500,000 is to be proactive about saving and investing. The sooner you start, the longer you have to take advantage of compound interest.
The first thing most people should do is open an employee retirement account, like a 401(k). At a minimum, contribute enough to get a full company match. Try to increase contributions up to the annual maximum allowed. For 2021, the maximum 401(k) contribution is $19,500.
If you’re able to max out your employer’s plan, supplement your retirement savings with a traditional or Roth IRA. Traditional IRAs allow for tax-deductible contributions, though you’ll owe taxes in retirement. On the flip side, a Roth IRA affords tax-free withdrawals in retirement since you’ll pay your taxes upfront.
A health savings account (HSA) 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. These 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.
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. If you’re lucky, you might even surpass that amount.
If you’re 50 or older (55 for HSAs), remember that you can grow your retirement savings faster that you did in the past. In fact, the IRS permits anyone who’s at least 50 to make “catch-up contributions.” These enable you to go beyond your accounts’ typical annual contribution limits. Here’s how much extra you can deposit in 2021 for each type of account listed above:
- 401(k)s: $6,500
- Traditional and Roth IRAs: $1,000
- HSAs: $1,000 a year through age 65 or until you’re enrolled in Medicare
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 Your Retirement
- A financial advisor can help you develop a savings and investment strategy to help you get ready for retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- 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.
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