Congratulations! You’re a few short years away from retiring. You’ve probably been planning for retirement in some way, shape or form for many years. As you get closer to retirement, you may start to wonder when you can retire and how much money you’ll need in retirement to last the long haul. It’s important to plan in more specific detail.
Here are 5 questions to ask yourself that will help you nail down the answer of whether you can (or cannot) retire at age 60 with just $500k in your retirement account – or if it’s not going to be enough:
How much will you spend in retirement?
Many Americans underestimate how much they’ll spend in retirement. They assume they can get by on a percentage of their current income, like 70 or 80 percent. However, having free time can lead to heavy spending. Once you’re retired, your schedule will be free to dine out, go shopping and take up costly hobbies. For example, you may want to travel more in retirement than you did when you were working.
Many people also fail to consider medical expenses in retirement. You may feel healthy now, but you’re likely to face health issues as you age. If you need in-home care or treatment in a facility, you can expect to pay a significant amount for it.
How much guaranteed retirement income do you have?
It’s always best to start your planning with those things you are certain about. There are some forms of income that are fixed and guaranteed. You know you’ll receive the income and you know generally what the amount will be. This income doesn’t fluctuate based on things like stock market volatility or interest rate changes. Knowing your base of guaranteed income will give you an idea of whether you have enough money to cover your most urgent expenses. If you’re fortunate enough to have a significant amount of guaranteed income, you may have a good foundation from which to build. If not, you may need to do some extra planning.
Do you have enough guaranteed retirement income to cover your required spending?
This is the big question. It will help determine how much additional planning you may need to do. If your guaranteed income exceeds your required spending every month, then you at least know that you have enough money coming in to cover basic expenses and maintain a comfortable lifestyle.
However, if your guaranteed income is less than your required expenses, you could have some difficulty maintaining your quality of life. That’s especially true if you don’t have a nest egg in non-guaranteed sources, like a 401(k) or IRA. You may need to implement strategies to help you cover the shortfall.
What do you do if you’re short?
In an ideal world, your guaranteed income would exceed or at least match your required expenses. You could then tap into your nest egg for discretionary expenses and for unpredictable expenses, like medical expenses.
However, if your guaranteed income doesn’t exceed your required expenses, you do have options. You need to either find a way to reduce your required expenses or increase your guaranteed income.
Many people reduce their expenses by downsizing their home. They get out from underneath their mortgage payment and cut down on household maintenance expenses. You could also look at going down to one car or trying to cut your utility and cable expenses. Consider refinancing or paying off high-interest debt.
What do you do with the rest of your nest egg?
Once you’ve balanced your guaranteed income and required expenses, you can start planning on how best to use and invest the rest of your nest egg.
However, you also need to keep saving for the future. You could be retired for several decades, and you’ll likely see prices go up during that time due to inflation. You also may need to tap into additional savings to help pay for medical expenses in the future.
Retiring doesn’t mean you stop saving and investing. On the contrary, it may be more important than ever to have a well-thought-out investment strategy. You have to strike a careful balance between funding today’s discretionary expenses and saving for unplanned expenses down the road.
So… can you retire comfortably on $500k?
It depends on how you answered those five questions. A happy and successful retirement starts with sufficient and realistic planning. By planning early, you give yourself the opportunity to take action and correct potential issues before they become reality. You can start the planning process by sitting down for a consultation with one of our financial professionals. Schedule your complimentary financial analysis here. We will review your current financial situation and retirement income needs and show you where more planning may be necessary.