“If you ask most financial advisers how to retire on a half-million dollars, they’ll likely say it can’t be done.”
Kiplinger published this very informative piece entitled ‘How To Retire On $500,000‘. You can read the whole article by clicking here. While the article is very interesting, it leaves out a very important component IMHO for retirement planing and that’s Social Security payments. If you’ve made a paycheck for 35 years in your working lifetime, please do not omit this valuable financial entitlement from your retirement portfolio. Contrary to what many nay-sayers may project, Social Security will always be around and you should take that into account as you prepare your own retirement projections. In other words, when you count in your Social Security benefits, you may not need to save a half million dollars. You probably will be able to retire with less savings. A lot less.
The median personal income in the U.S. is $33,706 per year, as of 2018 data. Not including Social Security, you’d need about $750,000 in your retirement account(s) to hit that number, if you followed this rule. Depending on where you live, as well as the lifestyle you want to maintain, you’d probably need to start with more. That’s why many advisers point even higher, stating figures between $1 million to $1.5 million as ideal retirement targets.
It’s a lot easier for someone who earned around $50,000 a year to retire than someone who earned (and lived) on $150,000 a year. Why? Because a person who lived on $50,000 probably lived a spartan lifestyle and will be used to living that same spartan lifestyle in retirement. A person who earned $150,000 is probably used to the finer things in life and will expect many of those fine things to continue into their retirements. Thus they will have to amass millions of dollars in order to maintain their luxurious lifestyles.
Generally, the rule of thumb is that you should anticipate to live on 80% of your pre-retirement income. For a person who earned $50,000 a year, he or she can retire and live on $40,000 a year. For a person who earned that $150,000 a year, 80% of their retirement would be $120,000. According to Social Security expectations:
The benefit calculations use the 2017 FICA income limit of $127,200 with an annual maximum Social Security benefit of $32,244 per year ($2,687 per month) for a single person and 1.5 times this amount for a married couple.
So, the $150K earner can only expect to receive about $32K in Social Security Benefits which is just about right for the $50K earner. The $50K earner will need much less in savings to make up the difference than the $150K earner will. Or, the $50K earner can just learn to live on the $32K in Social Security benefits and forgo savings altogether. (which I do NOT recommend. You have to save something towards your retirement). There’s no escape for that $150K earner. They have got to be saving lots and lots of money in order to sustain their lifestyle. I doubt very much that anyone who earned $150K in their working lifetime can retire to a lifestyle $32K can provide.
Which brings me down to me. It’s always about me, isn’t it here? Since I don’t have the financial wherewithal to advise anyone else what to do, I can only tell you what I can and will do in my own retirement planning. It’s no secret that neither I nor my husband were big earners in our working lifetimes. I never earned more than $28K a year and hubby never earned more than $56K. Together, give or take, we earned a combined gross income of $84,000. (once we earned $90,000 for the year but hubby had a lot of overtime that year, never to be duplicated again).
So, at $84,000 a year, we should be retiring on $67,200 BUT we’re NOT! Based on Social Security estimates, I always knew hubby and I could never save enough money to make up the difference and retire on the suggested $67K. What I did know was how much we were going to get in Social Security and a smallish pension, so I systematically downsized our lifestyle to meet the downgraded goal of living on less than $30,000 a year. Not a small feat, for sure. It didn’t go down easy, to say the least. I was the worst downsizer because it was sort of fun living on $84K a year. $67K would have been tolerable. $30K is near poverty level, or so I thought. But once you have a paid off home, paid for cars, no debt and a creative lifestyler (me) in place, living on $30K wasn’t as difficult as I thought it was going to be.
I’ve taken in the inflation factor and higher medical and housing expenses and recalculated our retirement years to be at an anticipated $40K per year. Needless to say our three pronged retirement stool of Social Security, Pension, Investment Interest will show at least a $2500 deficit per year. That deficit and any other unexpected expenses can be covered for the next 30 years of retirement (age 92-98+) from the savings we were able to accumulate (which is way less than $500K) thus I am not worried about our retirement futures (provided we maintain our current level lifestyle and do NOT increase it in any way).
Note: Keep in mind that our retirement lifestyle takes into account 5 months of RVing. This could always be reduced. Also, we could always sell and cash in our paid-for home and relocate to another area that is even less expensive than where we are living now and have some extra cash left over to sustain us. If my calculations miss their projected mark, we have options. It’s always advisable to have a Plan B in retirement planning. My recommendation is to also have a Plan C, D E and F!!
Figure out your end goal: how do you want to live YOUR life in retirement? It’s easy to calculate how much money you made in your working years and Social Security does a good job at forecasting what you will get in retirement based on when you decide to collect (starting at age 62 to 70 years of age). Be realistic on how much money you will be able to save towards your goal. I always stated to buy a forever home at least by age 35 with a 30 year mortgage, so you can live rent/mortgage free by age 65. A 15 year mortgage is also a good way to go. Never take out your precious equity because if you’re not a saver, you’re going to need that precious equity in your retirement years. Let your house work for YOU…..not the other way around. Keep up with maintenance and repair. Don’t go crazy putting in new, fandangled kitchens and baths but do keep abreast with design trends. Don’t ever have your home look dated!
I always knew I wanted an RV in my retirement years. I always knew I wanted to winter in Florida. I always knew I wanted to be at a beach in the summer. I tried buying homes in all those locations but sometimes vacation home ownership is not the best route to follow. Which brings me back to RVing. Having a solid, affordable home base plus an RV solved all my retirement vacation/travel goals. We did most of our international traveling while we were still employed. We couldn’t do that now in retirement. Why?
No one knows what their future may hold. I never expected my younger husband’s health to be so feeble. Turns out, I’m the strong one and have to carry out much of the retirement expectations. Make sure you know what your Significant Other’s responsibilities are and vice versa. Should anything happen to either one of you, the remaining partner can sustain, survive and carry on. Don’t be so smug and think bad things can’t happen to you. They can and they will.
Just make sure you have that Plan F in place!