When you hear about retirement planning some pretty big numbers get thrown around. But the
reality is that most people don't have one or two million dollars set aside. So let's look at what
it's like to retire with $500,000 and what we'll do is start with some calculations and give you
tips on how you can run these numbers for yourself with your own details. Then we'll go through some
strategies that can help you make that money last. Five hundred thousand dollars is sufficient to
retire on for a lot of people and a lot of people do it with less. Now, more is certainly better
but it ultimately comes down to your individual circumstances for example the amount you spend
is a big factor and that's going to depend on a couple of different things it might just be your
lifestyle but where you live also has an impact on your expenses any income sources that come
into your household are also important so if you have a pension plus Social Security (full Social
Security benefits) then that's certainly helpful if you have multiple sources of income coming
into the household that doesn't hurt and luck also plays a role in all of this so it might have to do
with what do the markets do right after you retire are they strong or do they crash? Or what type of
health care events come up what conditions do you have now and what might arise during retirement?
All of these things together are going to affect what your spending looks like to keep things
simple we're going to use some averages from the BLS the latest data available is roughly $48,000
per year that a household over age 65 spends but ultimately this needs to be useful for you,
so you can take the concepts that we talk about in this video and then overlay your own numbers
into the calculators that you're going to have access to, and that way you can get a decent idea
of what your retirement might look like. It's also helpful to know that your spending can change over
time during retirement for example some people talk about the go-go the slow-go and the no-go
years. So your go-go years are right after you stop working you're young and healthy and you're
eager to go out and do all of those things you've dreamed about doing but you might start slowing
down some and eventually you get to a point where you don't want to sit on an airplane for eight
hours and your health care costs start to rise as you spend less on leisure and entertainment.
Another big piece of all this is any retirement income that you get so that's Social Security
or pensions and Social Security is a big piece of retirement income for a lot of people in the u.s
so we're going to lean on that as we go through this if you have roughly $500,000 saved for
retirement then we're going to assume that you get a bit more than the average here because you've
had the earnings and the work history to help you save some money your age also affects how much you
get from Social Security, so that can impact your plan you really want to do some analysis
and make some decisions keeping in mind that you may have beneficiaries who might take over your
Social Security benefit. By the way, I'm Justin Pritchard, I help people plan for retirement
and invest for the future. So, in the description below, you're going to find some resources on this
topic, and I'll include some links to calculators that you can use to run your own numbers.
So we'll start with a single person example and then get into a couple, and these are over
simplified examples but the important thing is to paint the picture of how things might unfold and
show you how you can run some of these numbers yourself. We looked at some of those statistics
on spending and if you're going to retire with $500,000 in assets unless you have some really
great retirement income you're probably not going to be on the high end of those statistics so we'll
assume somebody here spending about 45 thousand dollars per year going to get 2 000 a month
of Social Security income so we'll put those numbers into our handy calculator here 45 000
of spending or income we're going to ignore taxes for right now but we'll get to that later
and she gets 2 000 a month in Social Security that leaves 21 000 that she's going to need to withdraw
from savings each year now you can play with an inflation rate and of course inflation is higher
right now the question is will it remain high for the rest of your life for the next 30 years
or something that would be interesting if it did so I'm just going to go with this for right now
and one year away from retirement let's say five and a half percent returns
both before and during retirement and 25 years of life maybe 30 years of life if we look at
the calculations there this person needs about 457 000 so depending on how much she has if you
already had 500,000 you might be all set however again this is an oversimplification so we have
ignored taxes let's assume that all of that money is in a pre-tax retirement account you're going
to have to pay some income taxes when you take withdrawals so one way to look at that is just to
increase again this is an oversimplification but you might say let's call it 50 000 and assume
roughly 5 000 in taxes each year and what might that mean well that might mean you need an extra
65 000 above the 500 000 you're thinking of another issue is that this assumes flat returns
each year and the fact is that you're never going to get exactly five and a half percent some years
you'll get five, some years you'll get six, some years you'll lose money, some years you'll earn
more, but they typically don't go in a straight line so we have to wonder what would happen if
you have bad timing for example if there's a big market crash right at the beginning of your
retirement. To help paint a richer picture of that let's look at a financial planning
program that's a little bit more robust so this is saying that she might have roughly a 50-50
chance of success and I've got some tricks to improve that but just for starters that's more
or less a coin toss so what does that mean if there's a 50% chance of success this is
a Monte Carlo analysis and so what happens is we might say that you get a thousand different
hands of cards. Some of those are really good those might be the ones up here that leave you
with a lot of money at the end of your retirement or the end of your life some of them are really
bad and you would run out of money early and in roughly 50% of these cases you end up just making
it you're probably not going to get the best luck as you go into retirement and hopefully you don't
get the worst luck but we want to be able to account for a number of different ranges here so
that if things are kind of bad or pretty bad that you have a decent chance of making it so what can
we do to improve those chances of success one way is to adjust spending so if you're flexible then
you can reduce what you spend in years when things are really bad or you might even look at something
like the retirement spending smile which is based on some research from David Blanchett which says
that retirees might spend it roughly inflation minus one percent now this has her with a 100%
chance of success which i don't like nothing is 100% certain i wish it would stop at 99%
but just by making that little adjustment this has dramatically improved the chances but it's
not something you can do on one of those basic online calculators just to look at a little bit
more detail on how this might unfold by the way this doesn't perfectly match what we looked at
in the basic online calculator but it's close enough for our purposes
so they have about five hundred thousand dollars here she's going to work for one more year then
that income stops she's going to wait until age 70 to take Social Security so there are a couple
years there with zero income and then a partial year then that full Social Security benefit
kicks in of course it's inflation adjusted so it's actually higher out in the year 2029 those
expenses are right around 45 000 when she stops working and there's that five thousand dollars of
taxes due so in these first couple of years when she has no income she's going to be taking
pretty big withdrawals to support her spending but once that Social Security income kicks in
then she can take much smaller distributions and that tax bill is going to come down and we can
take a look at that if we look at what her tax rate might be this is an effective tax rate so
this takes into account any deductions that you've taken, uh, typically people pay surprisingly low
taxes especially if you're at this asset level in retirement roughly $500,000 in savings if
you have a couple of million you're going to be in higher tax brackets especially later in life
once you start taking those required minimum distributions but at this stage and with this
asset level the tax rates can be surprisingly low for some people so that was our single example and
now we can look at a couple but I'm not going to go through all of those steps again they've
got two sources of income coming in so that makes it a lot easier to support higher spending levels
so let's jump over to the quick calculator just to see how that looks so they wanted 50 000 of income
or spending they've got 35 000 of Social Security coming into the household so that's only 15 000
they need to generate out of their assets let's throw on a little bit extra just for some taxes
and other things so we'll keep all of the other assumptions the same and it's a 30-year retirement
here they can also make do with less than 500 000 again ignoring some taxes and bad timing and other
things that might pop up as surprises but with a really simplified calculation they're at least
kind of in the ballpark with about 500 000 in assets of course it's important to plan
for one person's death and that might happen sooner or later so you want to look at how
that might affect the household as you're doing these ballpark calculations another thing you
can do is look at a withdrawal rate again it's an oversimplification but it's a way to kind of take
your temperature and just see if things look way out of whack or if they look more or less okay
so in this case we've got them pulling 20 700 out of their assets and that's based on let's call it
$500,000 of assets so if we divide that we get 4.14 percent is the withdrawal rate that these
people are taking the great debate is always going to be what is the right withdrawal rate so
the anchor point for a lot of people has been a four percent withdrawal rate
otherwise known as the four percent rule which is a bad name for it it's really more of a four
percent research finding and that's based on some research done long ago to try and figure out what
is the maximum amount that people could withdraw in really bad situations with historical data and
pretty simplified portfolios that happened to be four percent now if you look at that and you use
a more diverse portfolio it could potentially be higher however a lot of people will say that
given today's environment with low interest rates and wherever the market is a lot of people think
that four percent is too high this is something that people can quibble about for hours on end
so I'm not going to try and tell you what is your correct withdrawal rate i actually prefer to do
more detailed calculations like with the financial planning program i tend to find that that's more
helpful but it is often useful to figure out if you're looking at a six percent withdrawal rate
you might want to make sure that you have a backup in place or you have a good reason for
withdrawing a lot versus a one or two percent withdrawal rate you have to wonder if you are
selling yourself short once again any flexibility you have in retirement is extremely valuable so if
you're able to change your spending in response to how the markets do if you are running out of money
more quickly than anticipated then that is super helpful and maybe you can retire sooner or maybe
you can start with a higher withdrawal rate versus if everything is rigid and you're running pretty
thin then you want to go with a lower withdrawal rate because you don't have a lot of cushion to
adjust to life surprises so just for reference here we're looking at some data from JP Morgan,
their research on withdrawal rates and different portfolios and when might you have a relatively
high level of confidence when should you be more concerned and they give you a rough idea what I
like about this is it doesn't just point at one number it gives you some ranges and you can say
well I'm comfortable with certain ranges I'm good with green i don't like anything less than dark
green or you can say I'm willing to dip into some yellow because i want to retire sooner and I'm
willing to take chances and especially maybe i can make adjustments if things aren't going well so
what about taxes we said we talked more about that and taxes are important this is going to reduce
the amount of money you have for spending you need to budget if you're going to be taking withdrawals
from pre-tax retirement accounts because some of that money needs to go to the IRS the amount
you actually pay is going to depend on a number of different things and again if it's all in pre-tax
accounts you're going to have a relatively higher tax burden versus if that money is in Roth IRAs
and you satisfy all the requirements to get tax-free income so there could even be some
opportunities to do planning before you retire or before you start taking social security benefits
and there might be ways to reduce the amount you pay in taxes Roth conversions are an obvious
example of that now since we're talking about taxes it's time for a friendly reminder that this
is just a short video it's not individualized advice it's not enough for you to make some really
big detailed decisions on the rest of your life so please check with some experts work with a tax
advisor financial planner and triple check those calculations if you're doing all of this yourself
because we don't want you to run out of money early now this is just an oversimplified example
of what things might look like to help you visualize what the tax impact is so at this
point the person is taking social security we've got that single person example again
she gets 24 000 a year in social security so that means she only needs to pull out 21 000
from those pre-tax retirement accounts for ignoring state income tax and other factors
her tax burden is relatively small however it still takes a bite out of things and so if she was
thinking she has 45 000 of income that social security plus the withdrawals
what ends up happening is she has slightly less so she needs to either make up the difference
or pull out additional funds a lot of people ask about living off the interest or just not dipping
into the savings but spending the earnings and the dividends that come off of their investments i
get where that comes from perhaps you want to keep some money around for a health care event or maybe
you want to give assets to the next generation or to your favorite charity certainly makes sense
the reality unfortunately is that for people who have about 500 000 saved for retirement is that
those people are typically going to have to spend from their assets so what's important is that you
make sure you don't run out of money before you run out of life that goes back to some of those
planning questions and looking at a withdrawal rate that is going to make it likely at least
that you don't run out of money and remember that if you do run out of money you might still have
some social security income and other resources available but we really want you to be comfortable
and have assets to draw on for the rest of your life a couple of ways you can improve your chances
are you can explore different products i don't sell annuities and they can certainly be misused
but an immediate annuity for example can pay you income for the rest of your life and it's pretty
simple and inexpensive you certainly don't want to put all of your money into something like that
but it could help if you are driven by a need for security other techniques like buckets or
time segmentation could also help you improve your chances there are a lot of different ways
to go about this it just depends what feels right for you and if you're fortunate enough to own a
home and have some equity in it then that may be available for you down the road to help cover
some needs if some surprises come up so as you're figuring all of this out what can you
do to improve your chances of success there are a lot of moving parts but that means there are a lot
of opportunities to make little adjustments that can improve your chances remember those retirement
spending strategies so that's the go go slow go and no go years where you might reduce your
spending by a certain amount as you go through each phase or that retirement spending smile
which goes slightly slower than inflation but you might want to have certain categories of spending
that go faster than general inflation like health care expenses and in the category of least popular
solutions there is working longer now this could be something that helps you continue to save money
and if you're able to maybe spend more on the things you love then maybe you can keep working
not a lot of people want to do this but it is really powerful that's because it shortens the
number of years that you take withdrawals plus it can help your social security or your pension
benefit or both because you've got more years of earning possibly higher earnings and you tend to
claim at a later age which typically helps your benefit the drawback of that one I don't need to
tell you is that you have to keep working longer but even one year or a partial year can make a big
difference and take your time as you evaluate social security and other decisions like that
because when you claim can have a big impact on what your income looks like and it can also
open up opportunities like leaving some of those lower income years to make Roth conversions and
you certainly want to remember inflation and health care surprises as you go through all
of this because those can have surprising impact on things and health care is something that it's
kind of crazy we go into retirement we don't know how long it'll last we don't know what health care
issues will come up so it's really difficult to predict but those costs can really add up if you
get into let's say an Alzheimer's and memory care type situations so just think about those things
even though it's not fun think about what might happen if those situations were to arise. So I
hope you found this helpful. If you did, please leave a quick thumbs up, thank you, and take care