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It’s long been a rule of thumb that you should have $1 million saved for retirement, but most Americans today don’t think you actually need that much. A recent GOBankingRates survey found that the majority of Americans (38%) believe that you need $500,000 or less to retire. Thirty percent believe you can retire with between $500,000 and $1 million, and just 14% believe you need between $1 million and $5 million to fund a comfortable retirement.
So, is the majority right? GOBankingRates spoke to experts to find out if it’s actually possible to retire with $500,000 or less in savings.
How To Determine How Much You Need To Retire
Many financial experts caution against choosing your goal retirement amount based on any general rules of thumb. Instead, they recommend calculating your goal based on your own individual circ*mstances.
“How much you need to retire is a math equation based upon your expenses, the age you retire at, how long you will live and investing assumptions,” said Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth. “Each person has their own number and what they are willing to give up in retirement (or not).”
To calculate how much you will need, you will need to figure out how much it would cost to maintain the standard of living you want, plus your withdrawal rate.
“It is generally accepted in financial planning that for a secure retirement, you want to be able to withdraw from the capital gains or income from your portfolio without running down the principal, in order to be able to live on your pot in perpetuity,” said Ben Waterman, co-founder and COO at Strabo, a global portfolio tracker.
Are You Retirement Ready?
There are a number of factors that go into the “standard of living” portion of this equation, including where you live. In fact, Anessa Custovic, Ph.D., investment advisor representative at Cardinal Retirement Planning, believes where you retire is the most important factor.
“In some states, you can maybe comfortably retire with $500,000, but in others, you need almost $2 million,” she said. “Think about how different the cost of living is between a state like Mississippi and a state like Hawaii. In general, southern states are less expensive to retire in and have a lower cost of living.”
Is $500K Enough for the Average Person To Retire?
Zigmont said that it is possible to retire with $500,000 in savings — but this will likely not be enough for most people.
“It is possible to retire on $500,000 if your expenses are less than about $20,000 per year,” he said. “For most people, this means having no debt and being in a low cost of living area. It also depends on when you are retiring. If you are retiring at 70 — when you get the most from Social Security — and have $500,000, you will be in a much better place than retiring at 60 with no Social Security or Medicare.”
It’s also possible to retire on $500,000 — or less — if you have access to a pension.
“If you have a pension that meets the majority of your expenses on a monthly basis, you likely won’t need to have built up a huge nest egg over the years,” said Kyle Wetters, CFP, co-founder and managing partner at Tenet Wealth Partners. “Someone that needs to only take 4% from their savings annually versus someone who needs to draw 10% will have a much better chance of their savings lasting them through retirement.”
Are You Retirement Ready?
Considering that many Americans don’t have access to a pension plan, Waterman said that most people will need at least $1 million to retire comfortably, assuming they plan to live off of $50,000 per year.
“To be able to retire on $500,000 with a living wage of $50,000 per year, you would be drawing down at 10%, which is a fair amount higher than the expected return on capital in public markets,” he said. “Accounting for down years and projecting conservatively, one could assume a 5% safe withdrawal rate, given that the stock market has returned on average a few percentage points higher than this. You’d therefore need exactly double $500,000, or $1 million, to be able to safely draw down at 5% and live comfortably with some leeway.”
How To Catch Up If You’re Behind on Your Retirement Savings Goals
Once you know how much you will realistically need in retirement, you may find that you’re not where you should be in terms of retirement savings. Fortunately, there are ways to catch up. If you are 50 or older, you are able to make what are known as “catch-up” contributions to pad your retirement savings.
“Individuals age 50 and over can potentially contribute $6,000 plus an additional $1,000 per year to a traditional or Roth IRA,” Wetters said. “Within 401(k) and 403(b) plans, these same individuals may have the ability to contribute $20,500 plus an additional $6,500 per year to catch up.”
If you are younger, time is on your side.
Are You Retirement Ready?
“Start investing as soon as possible to take advantage of compound interest,” Custovic said.
On the other hand, if you are nearing retirement, you may consider ways to cut back on your expected living costs.
“Consider downsizing or moving in retirement,” Custovic said. “If you own a home and can sell it, take some of that equity and use it towards retirement.”
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Methodology: GOBankingRates surveyed 997 Americans ages 18 and older from across the country between Aug. 9 and Aug. 11, 2022, asking 16 different questions: (1) How much money do you currently have saved for retirement?; (2) How much money do you think you’ll need to retire?; (3) Realistically, at what age do you want to be retired?; (4) At what age did you start saving for retirement?; (5) What worries you financially about retirement? (Select all that apply.); (6) Do you plan to work in retirement?; (7) What assets do you have in your retirement portfolio? (Select all that apply.); (8) How has the current inflation impacted your retirement plans?; (9) How much of your retirement do you plan to fund with Social Security?; (10) How do you feel about the future of Social Security when you retire?; (11) What percentage of your salary are you currently investing for retirement?; (12) Are you planning to move after your retirement?; (13) Where is your ideal place to retire?; (14) What government programs do you plan to use for your retirement? (Select all that apply.); (15) Do you have a pension plan?; and (16) How much do you think the average American has saved at the time they retire? GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
As a seasoned financial expert with a comprehensive understanding of retirement planning, I can attest to the nuances and complexities involved in determining the ideal savings for a comfortable retirement. This article touches upon crucial aspects that play a pivotal role in shaping retirement goals and challenges, backed by insights from experts in the field.
The central theme revolves around the conventional wisdom that one should aim for $1 million in retirement savings. However, the GOBankingRates survey reveals a shifting perception among Americans, with 38% believing that $500,000 or less is sufficient for retirement. The article wisely emphasizes the need to move away from general rules of thumb and instead advocates for a personalized approach based on individual circ*mstances.
Jay Zigmont, Ph.D., CFP, stresses the importance of a personalized retirement savings goal, emphasizing that it is a mathematical equation considering factors such as expenses, retirement age, life expectancy, and investment assumptions. This aligns with the fundamental principle that one size does not fit all in retirement planning.
Geographical location emerges as a critical factor, with Anessa Custovic, Ph.D., highlighting the varying costs of living across states. This insight underscores the necessity of tailoring retirement savings to one's specific living conditions, a point often overlooked in generic guidelines.
The article explores the feasibility of retiring with $500,000 or less. While experts like Zigmont acknowledge its possibility under specific conditions—minimal debt, low-cost living area, and retirement at an optimal age—there is a consensus that this may not be sufficient for the majority. Kyle Wetters, CFP, notes the significance of pension plans in reducing the need for a substantial nest egg, but acknowledges that the majority of Americans lack access to such plans.
The need for a higher retirement savings threshold is emphasized by Ben Waterman, who argues that, considering a $50,000 annual living wage, most individuals would require at least $1 million for a comfortable retirement. His insights on safe withdrawal rates and the impact of market variability provide a nuanced perspective on retirement finance.
The article also addresses strategies for those behind on their retirement savings goals, such as catch-up contributions for individuals aged 50 and over and downsizing for those nearing retirement. These practical tips align with well-established financial planning principles.
In conclusion, this article navigates through the complexities of retirement planning, offering a nuanced view supported by expert opinions. The inclusion of diverse factors, from geographical considerations to the impact of pension plans, contributes to a well-rounded understanding of the challenges and considerations in determining the ideal retirement savings.
