How to Retire on $500K

Whether you can retire on $500,000 depends on myriad factors, including your budget, financial options and ability to be flexible.

Taking time to map out a budget and consider costs can help you avoid financial shortcomings later. You might discover you have enough to retire, or you could realize that you’ll want to accumulate more savings by working longer or taking on an extra job. Your investment strategy could also impact your overall retirement balance during the coming decades.

When considering how to retire on $500,000, use these guidelines:

The average American between the ages of 55 and 64 has $408,420 in retirement savings, according to data from the Federal Reserve. Those who are younger have lower balances, while older individuals tend to have more. For Americans between the ages of 65 and 74, the average retirement savings is $426,070.

If you have $500,000 set aside for retirement, you’ll have more long-term savings than average. But you’ll want to factor in market trends and conditions before retiring.

“Inflation has increased the cost of goods and services every year since 1955 except in 2009 when inflation was down only 0.4%,” says Camille Gaines, a financial coach and founder of Retire Certain in Austin, Texas. Inflation has occasionally hit double digits, such as 13.5% in 1980. In 2022, it hit a 40-year high. You may realize you need more to cover everyday expenses if prices continue to rise.

If you’ve earned work credits and have paid taxes into the retirement system, you could be eligible for Social Security benefits. You can create a My Social Security account to see how much income you can expect in retirement.

The age at which you apply for benefits could impact the amount you receive every month. If you start collecting Social Security before your full retirement age, your benefit amount will be lower.

“Delaying the commencement of Social Security benefits can result in higher monthly payments, depending on the circumstances,” says Michael Callahan, founder and CEO of The Callahan Law Firm in Houston. Waiting past your full retirement age will lead to an uptick in benefits every year until you turn 70.

The amount you take out of your retirement accounts each year will affect how long your savings will last. “Most retirement plans use a 4% annual withdrawal rate increased for inflation most years,” Gaines says. Using the 4% rule, if you have $500,000 in savings, you could withdraw $20,000 in the first year. “You’ll want to consider if you’ll be comfortable making withdrawals from your hard-earned retirement savings and at what rate,” Gaines says.

Make a list of your monthly expenses to determine whether your retirement income will be sufficient. If funds come up short, you’ll need to rework your budget.

“Do an analysis of household expenses and make sure you’re debt-free,” says Wilson Coffman, president of Coffman Retirement Group in Huntsville, Alabama.

You could also think about downsizing to reduce your housing costs. If you have a bucket list for retirement, you might prioritize activities that are most important to you. Once you check those off, you could revisit the other items and see if you have enough money in your budget to carry them out.

If you think withdrawing $20,000 a year, plus Social Security, won’t be enough to live on, you could research ways to earn more cash. Some retirees pick up a work-from-home job with flexible hours, while others take on seasonal work at nearby parks or stores so they can be social and active.

“The effect of an extra monthly income source can be huge,” Gaines says. “If a retiree generates $800 in monthly income from a source outside of their retirement savings, that amount equates to making an annual 4% retirement account withdrawal on $240,000.” You might be able to use the extra money to cover extras like entertainment, travel or eating out with friends.

If you’re retiring in your 50s or 60s and are considering how to cover expenses in the coming decades, you might want to rework your investing strategy. “A portfolio that is adequately diversified has the potential to generate income and develop your savings over time,” Callahan says. Make sure the plan you set up aligns with your risk tolerance.

You could also investigate ways to have a guaranteed income if you’re worried about running out of cash. “You may want to consider taking the $500,000 and creating a second pension,” Coffman says. “This can be done by investing the funds in an index fund annuity which offers tax deferral, multiple index options and guarantees funds.”

While it can be easy to enter retirement with a plan, the reality could necessitate changes. Market fluctuations could have an effect on how much you should withdraw every year. If your adult children move to a new location, you may be interested in living closer to them. Or you might find you love cruising and decide to take as many trips as possible.

Unexpected events can often alter your monthly budget. Keep in mind that while travel costs might decrease if you decide to stay home, other fees could go up. For example, “expenses for health care tend to rise with age,” Callahan says. Keep a flexible outlook so you can adapt your lifestyle as needed and make the most of your retirement savings.