Half a million dollars may seem like a lot of money, but if you’re nearing retirement, is it enough?
If you have $500,000 in a pre-tax IRA and expect $2,000 per month from Social Security, you may have enough money to retire at age 67. Half a million dollars is a relatively modest nest egg, but it still produces a comfortable income depending on your standard of living. Here’s what to think about as you plan for retirement around these figures.
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First, be sure to consider your health and longevity. Are you planning to retire at age 67 for health reasons or are you healthy enough to continue working, if needed?
As you hit your late 60s and 70s, your health may become unpredictable. Even if you are still in good health, your workday may become more boring over time. You may not be able to continue working after 67, regardless of financial situation. So while it’s worth considering whether you can continue to work past age 67, it’s also important to think about how long your $500,000 can last in the event that you need to call it a career at age 67. A financial advisor can help you decide when the right time to retire is.
A Social Security card is sandwiched between $100 and $20 bills.
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Another question is how much money your portfolio will generate.
“Undervalued situations typically indicate less room for error,” Brian M. Kuderna, founder of the Kuderna Financial team, told SmartAsset. “There is always more to consider, but … removing the variables to simplify the math means that $500,000 in a 20-year hypothetical retirement equals an annual cost of $25,000.”
Here’s the starting point: $4,000 a month in cash withdrawals and Social Security income.
While half a million dollars seems like a lot of money, it’s a lot less than retirement savings. Most of your earnings will depend on how you invest that money and schedule your withdrawals. For example, as Kuderna notes, you could keep everything in cash and withdraw about $2,000 per month for 20 years.
On the other hand, say you invest your entire portfolio in bonds. On average, modern corporate bonds return about 4% per year. By doing this, you can reduce your withdrawals a bit and live independently on about $3,666 a month in Social Security and interest payments. Or, if you’re willing to reduce principal, you could generate $4,800 a month in combined interest and withdrawals over 20 years.
Life annuities can generate a little more, giving you a combined income of about $5,300 a month in Social Security and pension payments. The difference here is that it will last indefinitely, with the risk of termination of the principal. And if you need help choosing investments for your retirement accounts and want advice about annuities, talk to a financial advisor.
A couple does some math to figure out if they’ll be able to retire at age 67.
Expenses are a key part of retirement planning.
Depending on how you manage your money, you can expect an annual income between $48,000 (approximately $4,000 per month) and $63,000 (approximately $5,300 per month). More is possible if you invest for more aggressive returns, but that will mean taking more risk.
Whether this income will be enough money depends largely on your expenses.
Now, one of the green flags here is your Social Security income. A monthly benefit of $2,000 at full retirement age means you’ve likely earned about $70,000 a year over your working life — not far from your combined retirement income.
But there are three important points to consider.
First, taxes will take some of that income. Your IRA is a pre-tax portfolio, so withdrawals are taxed as regular income, not capital gains. The IRS will tax you based on your tax bracket when you make your withdrawal.
Second, you must plan for inflation. While your Social Security benefits will be indexed for inflation — meaning they generally increase on an annual basis — cash and fixed-income assets such as bonds and annuities, which are not discussed above, will increase. You may need to invest in assets that will provide an element of growth to your portfolio and help you weather inflation.
Finally, you should choose a more aggressive withdrawal rate, which can expose you to longevity risk – the possibility of outliving your money. Following the standard 4% rule would mean withdrawing only $1,666 per month from your IRA in your first year of retirement and that may not be enough to meet your spending needs. An approach that produces about $3,000 per month in IRA income will bring you closer to your potential pre-retirement income, but it will mean withdrawing 7.2% of your portfolio within 1 year of retirement, which is pretty high. A financial advisor can help you determine how much money you can afford to withdraw from your IRA.
Can you afford to retire? It totally depends on how your portfolio is invested and your goals.
Creating an IRA requires more than a 401(k) plan, which is typically managed by a professional on your behalf. Here are a few tips and strategies for making the most of your IRA.
A financial advisor can help you create a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t subject to significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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