TABLE OF CONTENTS
- Factors To Consider When Determining Retirement Needs
- Using The 4% Rule With $500,000
- Investing Strategies To Maximize Retirement Savings
- Consider Other Retirement Income Sources
- Risks To Consider Before Retiring
- Seeking Professional Advice
- So, Can You Retire With $500,000?
- Frequently Asked Questions (FAQs)
Retirement is full of surprises, both good and bad.
Your investments may be going like gangbusters one day and beefing up your $500,000 retirement savings, and the next day, they may head south. In addition, as you age, your health could falter, resulting in unexpected bills for healthcare, transportation and home aides, thereby shrinking your nest egg.
“Retirement isn’t a straight path. It's more like a winding road with ups and downs,” Ashley Folkes, CFP, of Inspired Wealth Management in Birmingham, Alabama, told me. He said, “it’s important to be flexible and ready for anything.”
This article lays out whether you can retire comfortably on $500,000 in savings and investments and how you can maintain and grow investments, whether you can earn money after you retire and why living within your means is crucial.
Factors To Consider When Determining Retirement Needs
The many unknowns of life and of retirement life, in particular, are life expectancy, inflation, investment returns, income sources and healthcare costs.
“A person needs to figure out what their expenses are, as this will help to determine how much of an income is needed,” Ken Nuttall, chief investment officer at BlackDiamond Wealth in Wilmington, Delaware, told me.
Healthcare Costs
Healthcare represents a large, unpredictable cost in this country. “Research has shown that many Americans consistently underestimate just how much they may spend on healthcare in retirement; in fact, a 2022 survey found they expect a couple to spend just $41,000 on healthcare once they retire, far below Fidelity Investment’s estimate of $157,500 for the average 65-year-old retiring this year,” according to the financial firm. The next year’s estimate showed no increase, but, for perspective, in 2002, healthcare would have cost a single retiree about half of what it is today, or $80,000, noted Fidelity.
With those numbers in mind, Betty Wang, CFP, of BW Financial Planning, in the Denver metro area, told me that retirees need to embrace living frugally, maintain a solid emergency fund for extraordinary expenses and be well-versed in their medical insurance coverage and the copays required.
Life Expectancy
Life expectancy of Americans has been declining in recent years, according to the Centers for Disease Control and Prevention. Women are projected to live longer, on average until about 79, while men are expected to die about six years earlier. However, there are many exceptions to those projections.
“We usually think of people living to age 90, though we do ask how old their parents were when, or if, they passed,” said Nuttall.
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Using The 4% Rule With $500,000
The 4% rule, typically a starting point for a discussion between clients and financial advisors, is a way to systematically and annually parcel out all your investments, retirement accounts, and residual income, so that you have enough to live on throughout your retirement, according to the insurance company New York Life.
To come up with the amount, you add up all your investments, retirement accounts and regular residual income, then you calculate 4% of the total, and that, plus your Social Security, pension payments and, perhaps, dividend stocks and minus taxes, is what you have to live on during the first year of retirement. Each year, you also adjust your outtake to the current inflation rate. If, for example, you have $500,000, then in your first year, you would withdraw $20,000.
Nuttall noted that a $500,000 portfolio could be workable for some retirees. He estimated that the amount could yield $25,000 in interest when invested in Treasury bonds now. Add to that $25,000, he said, $20,000 for the 4%, giving the person $45,000, plus about $20,000 in Social Security payments, to come up with a total of $65,000. Conservatively speaking, he added, taxes would take a quarter of the total. “If that can cover expenses, they will be good,” said Nuttall.
The 4% rule isn’t for everyone, though, said Wang; a customized withdrawal strategy recommended by your financial advisor may be your best plan. “Assessing anticipated living expenses in retirement is the main step, factoring in inflation and available resources like savings and guaranteed-income streams,” Folkes told me. “The objective is to enter retirement debt-free, with a grasp on recurring expenses, including periodic major purchases like vehicle replacements.”
Investing Strategies To Maximize Retirement Savings
It’s key to stay on top of your investments in retirement, just as you may have done during your working years. That includes maintaining the proper asset allocation, risk tolerance and diversification.
Nuttall said that you need to be diligent with savings, such as IRAs and brokerage accounts. “The longer they invest, the more likely they are to succeed,” he added. Wang recommends that you invest in low-cost diversified ETFs (exchange-traded funds) and live below your means.
Consider Other Retirement Income Sources
Retirement investments and savings are just a piece, although usually a big piece, of what retirees can live on. Social Security, pensions, annuities, stock dividend income and paid work can add to your financial mix.
For Americans over 65, paid work is an especially viable source of income nowadays. According to the Pew Research Center, “Older adults are one of the few age groups that are expected to increase their labor force participation rate over the decade. The Bureau of Labor Statistics projects that 21% of older adults will be in the labor force in 2032, up from 19% in 2022.”
Two reasons for that upswing, Pew noted, is that today’s older adults are healthier and less likely to have a disability than in the past, which makes it easier for them to extend their work life.
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Risks To Consider Before Retiring
Healthcare Costs
As Folkes mentioned, retirement does not travel a straight path; it is filled with twists and turns. You need to understand your healthcare costs and coverage so that you can live a healthy, active and long life, deal with market volatility by maintaining the right asset mix and handle unexpected expenses by having money put aside in an emergency fund with at least six months of expenses.
“The biggest risks in retirement are market volatility and longevity,” said Nuttall. “If you retire at age 65, the chances of living to age 90 is nearly 50% for a woman and nearly 40% for a man. If a person started working at age 22, and retires at age 65 and dies at age 90, that means the person worked for 43 years and is now trying to live in retirement for 25 years. That can be a big ask.”
Wang says it’s essential to understand what your health insurance does and does not cover to ensure that your health needs are met and you can see a doctor when warranted. For example, while Medicare covers many things, it does not pay for vision care, including exams, eyeglasses and contacts, or dental care, both of which are expensive, and some types of medical equipment, such as walkers and scooters. Nor does it cover long-term care, which most elderly people will need. You must buy your own long-term care policy.
Housing Costs
Housing is also a critical issue to settle, whether you stay in the home you have or downsize, and it must be made with your financial interests and comfort in mind, ideally with the help of an experienced financial professional.
Seeking Professional Advice
Working with a financial advisor is best when you consider it a partnership that lasts throughout your retirement years, not just during your earning years. A financial advisor can customize your retirement savings, help you set up contingency plans and an emergency fund, make sure your investments are on track and that your taxes get paid on time, and advise you if you need to bring more money in through a part-time job or investing in dividend-paying stocks.
“Financial advisors can be an objective, educated guide, because money is emotional and retirement is a huge change,” said Wang. “It helps to have a trusted, knowledgeable person talk you through what’s going on. This is not a situation where you want Cousin Eddie who dabbles in the market to be in your ear.”
She noted also that a solid withdrawal strategy while retired, which is tailored to your situation by your financial advisor, is as important as your accumulation strategy was while working.
Added Folkes: “When investing for retirement, strategies vary based on one's risk tolerance, typically leaning toward a conservative stance for steady growth, if at all possible. There are cases where it can be too conservative and needs to be adjusted, because inflation and taxes impact your bottom line.”
So, Can You Retire With $500,000?
Many people can retire with $500,000 in retirement investments and savings. Before you leap, know that while it can be done, that amount will yield a modest, even a frugal, retirement. Nonetheless, by planning and getting advice from a financial advisor, living within your means, maximizing your investments, and relying on income from an extra job, if needed, and dividends, you can make it work.
Frequently Asked Questions (FAQs)
Is $500,000 enough to retire comfortably?
It depends on your definition of comfort. If that means unlimited spending and vacationing, probably not. If you don’t mind monitoring your spending and paying your bills first, limiting restaurant outings and keeping your clothing or gift purchases in check, the answer is yes.
What age can you retire at with $500,000?
Are you debt-free, unencumbered by a mortgage or credit card bills? Are you ready to leave the workforce and go for a more unstructured life? If your responses are yes and yes, choose your age.
How long may $500,000 last in retirement?
It depends on how and how long you live. One financial professional suggested that retirement can last for 25 years or until age 90 when a person retires at 65. Wise investing, frugal living and, perhaps, a part-time job can spread out your savings and investments for more years.
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The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download Forbes' most popular report, 12 Stocks To Buy Now.
