Everyone should retire when they are ready with as much money necessary to cover their living expenses. This is true financial freedom in retirement. Whether you are relying on Social Security Benefits, Roth IRA, Traditional IRA, Pension, Savings, Real Estate, Stocks, Bonds, or a 401K plan you should consult a financial advisor regarding your retirement plan. Hence, reviewing all your various nest egg savings will answer the following question. Can I retire at 60 with $500K (Yes, and I can show you how)? Even if your retirement income does not include all these various retirement accounts.
What are these various retirement accounts?
The best way for early retirement requires various savings accounts and investment accounts. However, some of you may still have the luxury of pension income that will negate having to invest a substantial part of your income into investment products. Let’s review each of these financial products.
Traditional savings accounts are ideal as starter accounts for children and transitional accounts for emergency funds. Once you reach your first $1,000 consider moving additional funds into a high-yield savings account. Hence, saving accounts are not necessarily the best option for a retirement nest egg as even the high-yield accounts generate less than 2% in interest.
Social Security is a government program created to stabilize the financial situation of Americans. The Social Security income is made up of taxes you pay into the Social Security program. It is a dedicated payroll tax where Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $147,000 to date. The self-employed pay the full 12.4 percent. Social Security payments averaged as of January 2022 were $1,614 per month or $19,370 per year. This is a very modest income for most retirees. The maximum benefit for social security is $4,194 for someone who files at age 70 and is based on their salary. However, Social Security is not just a retirement program because it also provides life and disability insurance protection. Here is more information on Social Security income provided by the Center on Budget and Policy Priorities.
IRAs are individual Retirement Accounts. There are Roth IRAs and Traditional IRAs. The main difference between these two is in how you contribute to them. Roth IRA is an after-tax contribution. In a Traditional IRA, you can contribute pre- or after-tax funds. Your money will grow tax-deferred, and withdrawals will be taxed at your current income after age 59 ½. Please consult financial experts when deciding which financial products best meet your financial needs.
Pension and 401k
A pension plan is where an employer agrees to pay a set amount of money to their employees in retirement. The employee contributes nothing to this program. The average private pension is $9,262 per year. State and Federal government pensions range from $22,172 to $30,061 per year. State and Federal employees can also collect Social Security benefits. Together, they are a great way to have multiple income sources for financial independence in retirement.
A 401k is funded by the employee. Sometimes, an employer may elect to match a portion of the employee’s contributions. It can range from 2% to as high as 15%. However, some employers will elect to contribute a set amount, like $500 or $1,000. This is solely at their discretion. 401k contributions are invested in stocks, bonds, and mutual funds which are selected by the employee based on their investment decisions and personal circumstances.
Stocks and Bonds
Stocks are a fraction of ownership from the issuing corporation in the form of shares. Most stocks can be high-risk and high-return investments. It can require a lot of time and effort to research and invest in the right stocks. The key to investing is determined by the length of time in the market. The longer the better to realize the historical average gains of 10% or more. Many people have made a lot of money investing in Stocks. For example, if you purchase $1,000 worth of Tesla Stock in 2011 it would be worth over $204,000 now. This stock increased from $5.74 to $1,229 over 10 years. Therefore, many people have made a lot of money investing in Stocks, but it is a long game.
Bonds are issued by governments and corporations to raise money. They are a loan that they agree to pay back within a certain amount of time with interest. There are three types of bonds Corporate, Municipal, and Treasury Bonds. All bonds are debt and are rated from AAA to DDD, with AAA being the best and DDD the worst. The ratings are like individual credit reports. Based on these ratings you would not invest in any bond with a rating of C or below because they have a high risk of defaulting. Similarly, a bank would not issue a loan to anyone with a credit score below 580.
Retirement income can be increased by owning investment properties in the form of real estate. These properties can be rented out or sold to increase your retirement income. The bottom line there are pros and cons to owning investments that may carry mortgages into retirement. Therefore, make sure they are generating enough income to cover any unpaid mortgages. Otherwise, rental properties can be great sources of income or extra cash.
Budgeting For Retirement
The main way to determine if you can retire at 60 with $500k in savings is to do a budget. When I was in my late 20s, I began to think about retirement. Mainly, because my job began offering a 401k. I knew nothing about investing but I did know about budgeting and saving. First, I quickly jotted down some numbers based on my life expectancy and my estimated living expenses. I came up with an estimated number of about $565,000. It was very rudimentary as it did not take into consideration inflation or my future spending habits. However, it allowed me to see how much I might need based on my current lifestyle. Here is a retirement calculator from nerdwallet.com and a Monthly Retirement Expenses calculator from Jackson.com for you to check out.
However, by the time I reached my 40s, it was time to take stock of where we as a family were headed. By diligently, investing in our 401k plans my husband and I began to see some substantial growth after about 20 years. The investment returns were looking like a good idea that was becoming a healthy retirement plan. We needed to consider how to have a comfortable retirement. What were our retirement goals and how to achieve them?
Our Retirement Goals
In speaking with our Financial Advisor, we knew that based on our retirement savings goals we could not have a comfortable retirement in our current home in New York. We would need to lower our cost of living substantially. First, we began to pay down our debt, increase our investment savings, and consider downsizing to save on housing costs. We were able to relocate to a cheaper location to a smaller home and we capitalized on this opportunity. The kids had completed their schooling and were moving out. It was time for us to jump-start our plan.
Our retirement fund and Social Security were going to be the foundation of our monthly income in retirement, and we needed to know if it was going to be enough money to live comfortably. However, we first had to tackle expenses i.e., debt. We knew we wanted an early retirement in our 60s and needed a retirement budget to do so. Working with modest retirement accounts, say at $500,000, and Social Security benefits estimated for both of us at about $60,000. Therefore, review your statement from Social Security or call them before retiring for the best benefit estimate.
However, if something happens to either of us, this number could drop to about $30,000 or less. Therefore, we need to be careful how we spend our investment portfolio as the surviving spouse may need it to add to their annual income. We also have our home which we plan to pay off before we retire. For instance, the income from selling it could potentially be added to our nest egg. Our estimated expenses over the next 20 years plus our projected income of 1.2 million from Social Security, our retirement budget, and our retirement savings goal are looking pretty good. Let’s look at projected retirement expenses, debt, and how to manage retirement income.
Our Cost at Retirement
Our plan includes paying off our biggest expenses. For us, this would be our mortgage. We refinanced to a 15-year mortgage and are currently making extra payments to have it paid off in 7 years. This would be my husband’s retirement year. Even though his full retirement age is 70 the current plan will have him retiring at 62. With the house paid off, we will only have to pay property taxes, HOA fees, insurance, and utilities to maintain the house. This totals about $640 per month. So far so good.
Since our home was built in 2016, we should be good for at least 20 years before we need to replace the roof, heating and air conditioning or any other typical repairs older homes may experience. However, should we need to replace any of these items in 25 to 30 years we will have to budget for their replacement from our emergency fund or yearly retirement withdrawal.
Debt in retirement
We currently have no debt from credit cards, student loans, or car loans we are in a great financial position with those costs being at $0. This is true financial freedom. However, by the first year of retirement, we may have to replace one or more vehicles. We will need to save for this before we retire or take a lump sum distribution from an investment account. This is in keeping with our debt-free retirement plan. The only cost associated with car ownership would be car insurance and some car maintenance. If we plan to keep one to two cars, we will need to estimate the cost of insurance and maintenance for each vehicle. These costs could run from $250 to $300 a month depending on insurance costs, maintenance on an older vehicle, and gas prices.
Health Care expenses in retirement
Health care cost is estimated to be about $5,700 per person or $11,400 for a couple per year for retired people. That would be about $950 per month for us. Or $315,000 per Fidelity Retiree Health Care Cost Estimate. Based on our family history this may not be the case and could be lower. However, one never knows so we will plan for the worst-case scenario for medical expenses.
Food and other expenses
Then there is food. Our current budget is $800 per month but this could be lower or higher depending on our dietary needs. $800 a month for two people seems a bit high to me as the suggest monthly budget is $553 is the national average. However, this also includes dining out from time to time.
Finally, there are clothes, traveling, and entertainment. As we get older, other than travel expenses, I don’t see us spending a lot on clothes and entertainment. I will earmark for now about $5,000 per year in travel expenses for the first 10 years of retirement. This expense will primarily come from our vacation sinking fund and/or retirement accounts.
Final Estimated Retirement Budget
This brings the monthly expenses to about $3,000 per month. With a projected monthly income of $5,000. This leaves extra money of $2,000 left to save or have more fun or fund a pet project. The living expenses are based on relocating from New York to South Carolina where there is a lower cost of living. But wait, what about the retirement funds?
|Joint Retirement Budget||SS#1||SS #2|
|Percentage of Expenses Based on Income||60%||40%|
|Property Taxes & Insurance||$170||$102||$68|
|Car Insurance, Maintenance, Gas||$300||$180||$120|
|Monthly Discretionary Income||$2,000|
What about the Retirement Funds
Based on the above income and expenses. We may not need to tap into our retirement accounts unless we must make an unexpected purchase, home or auto repair, or a major health issue. We will subsequently, prepare for these unexpected expenses by allocating funds for these events. However, the government does require that we take the minimum distribution from our retirement accounts by age 72. Historically, the withdrawal rate of 4% is proven to be most effective 90% of the time. Hence, if our circumstances drastically change, we will probably withdraw the required minimum distribution the year after we reach age 72.
However, 4% of $500,000 in retirement savings is about $20,000 per year and will last for about 30 years. Therefore, if you live a frugal life, along with social security benefits of $19,370. Your retirement income could total $39,370. However, with living expenses at or under $3,000, $500,000 in retirement savings could be enough to last your entire life. The key is to start your retirement years debt-free in an affordable location. If this is not possible, then you may need to supplement your retirement income with part-time work or side hustles.
Easy Investment Strategy
It is never too late to begin saving for your retirement. Yes, starting your retirement savings in your 20s is a great way to jump-start your retirement. However, the average person begins in their 30s or even their 40s. Even though most people plan to retire between 65 and 67, the average age is 61. Hence, starting as early as you are able will give you a huge advantage in reaching $500,000 to retire at 60 comfortably. Both of my sons are currently in their 30s and I am strongly advising them to save at least 15 to 20% of their gross income in their company’s 401k plan. This is the easiest investment strategy and a great starting point. This is the strategy I gave them for a successful retirement.
- Review your current financial situation by creating a budget
- Identify any expenses that can be eliminated to use for savings and investing
- Pay down or eliminate debt before retirement
- Consult with a Financial Advisor to review retirement assets
- Contact the Social Security Administration to determine benefits at ages 62, 65, 67, and 70
- Create a retirement budget based on your retirement lifestyle
- Determine if you need to downsize or can relocate for lower housing prices
- Consider part-time work or side hustles