22% of Americans Think They Can Retire on $500K or Less — Is That Feasible?
Written by
Jake Safane
Edited by
Gary Dudak
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In most circumstances, $500,000 is no small sum, but when it comes to retirement, it’s not enough for many Americans. Yet, a recent GOBankingRates survey found that 22% have a retirement savings goal of $500,000 or less, and 31% don’t have a goal at all.
That’s not to say that it’s impossible to retire on $500,000 or less — many do — but it can make retiring comfortably a challenge. The average retirement account balance for those ages 65-74 is over $600,000, but that’s skewed toward those with larger balances, considering the median amount is $200,000, according to the Federal Reserve.
While that might still sound like a lot, consider that retirement savings are often meant to last for decades, without much income to replenish these balances. When you add up ordinary living expenses like food, healthcare and housing (even if you don’t have a mortgage, costs like taxes, insurance and utilities can be high), it can be hard to turn even $500,000 into enough retirement income.
“I think this is a bit of a low goal for the average person to try and retire with. The person would need to have low expenses to be able to retire comfortably and/or have a sizable pension,” said Larry Sprung, CFP, founder of Mitlin Financial.
With that in mind, let’s explore whether retiring with half a million dollars or less is feasible these days.
Average Might Not Cut It Anymore
Suppose you and your spouse had $500,000 in retirement savings and took out 4% per year, an amount often used as a rule of thumb for retirement withdrawals. That would yield $1,667 per month in retirement income.
Then, if you add in the average Social Security retirement benefit of $1,907 per month and assume your spouse also gets that amount, your total Social Security plus retirement savings drawdowns would be $5,481 per month.
If you compare that to how much the average American age 65 or older spends — $4,345 per month, according to the Bureau of Labor Statistics — then $500,000 or even a little less in retirement savings might seem like plenty, as you could have more than the average in monthly spending.
The problem, however, is that average might not cut it.
Consider how 80% of American households with older adults are either financially struggling or at risk of facing economic insecurity, according to the National Center on Aging (NCOA). One issue is that health-related costs could wipe out your retirement savings. The NCOA analysis found that 60% can’t afford two years’ worth of in-home long-term care, and 45% of those ages 60+ have an average income that makes basic living needs unaffordable.
Thus, $500,000, even if yielding more than the average amount of retirement income, might not be enough to sustain a retirement lifestyle with minimal financial stress, especially if you live in a high cost-of-living area or if you live to an old age.
“In many cases, $500,000 in savings will not be enough,” said Sprung. He added that one option to help “would be to explore places to live where the cost of living would be in line with this type of savings.”
Evaluate Your Situation
To see if $500,000 or less is a feasible retirement savings goal, or to figure out how much more you’d need to afford a comfortable lifestyle, it’s important to look at the details of your own situation, rather than just broad averages.
Even cost of living data doesn’t always tell the full story at first glance, as you might find a state with a relatively low cost of living like Texas has cities with above-average costs of living, like Dallas and Austin. So, it’s important to compare data based on the details of your retirement vision, like where you want to retire and what you want your lifestyle to be.
“Cost of living is simply one component in determining if you have enough money saved for retirement,” said Sprung, along with “when you will retire and how long you will live.”
He continued, “Those retiring earlier in life with much higher expenses will need to have significantly more saved than someone planning to work their entire life with limited expenses. Only when analyzing the person’s personal situation can the amount needed to retire be determined.”
As you look more closely at your specific situation, you might find that you need a more ambitious retirement goal. If that’s the case, one option is to take a closer look at your current expenses to see if you can make some cuts that enable you to save and invest more for retirement.
“Chances are there is some fat in the budget that they could remove and allocate those funds toward their retirement goals,” said Sprung. Such expenses may include subscriptions and travel.
What’s Best for You?
Remember, retirement is personal. Just because one person cuts down one type of expense to beef up their retirement portfolio doesn’t mean you have to. Your spending leading up to and during retirement can differ based on your priorities.
The GOBankingRates survey found that respondents were fairly split in terms of what they’re most looking forward to in retirement, with there nearly being a tie between picking up new hobbies, spending time with family, and travel.
So, if travel is highest on your list, you might cut down on expenses like housing if possible, whereas someone who prioritizes spending time with family might need to spend more money to live close to their kids and grandkids.
Ultimately, you need to evaluate your situation and see what your costs will likely be in retirement and how that aligns with your retirement goal. If the numbers don’t add up — as many with a goal of $500,000 or less could find — then you may need to adjust some levers, such as your costs now so you can save more for retirement, your fixed expenses in retirement, or your retirement age.
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