Retire With $500,000: How it Works, Examples - YouTube

When you hear about retirement planning some  pretty big numbers get thrown around. But the  

reality is that most people don't have one or two  million dollars set aside. So let's look at what  

it's like to retire with $500,000 and what we'll  do is start with some calculations and give you  

tips on how you can run these numbers for yourself  with your own details. Then we'll go through some  

strategies that can help you make that money last.  Five hundred thousand dollars is sufficient to  

retire on for a lot of people and a lot of people  do it with less. Now, more is certainly better  

but it ultimately comes down to your individual  circumstances for example the amount you spend  

is a big factor and that's going to depend on a  couple of different things it might just be your  

lifestyle but where you live also has an impact  on your expenses any income sources that come  

into your household are also important so if you  have a pension plus Social Security (full Social  

Security benefits) then that's certainly helpful  if you have multiple sources of income coming  

into the household that doesn't hurt and luck also  plays a role in all of this so it might have to do  

with what do the markets do right after you retire  are they strong or do they crash? Or what type of  

health care events come up what conditions do you  have now and what might arise during retirement?  

All of these things together are going to affect  what your spending looks like to keep things  

simple we're going to use some averages from the  BLS the latest data available is roughly $48,000  

per year that a household over age 65 spends  but ultimately this needs to be useful for you,  

so you can take the concepts that we talk about  in this video and then overlay your own numbers  

into the calculators that you're going to have  access to, and that way you can get a decent idea  

of what your retirement might look like. It's also  helpful to know that your spending can change over  

time during retirement for example some people  talk about the go-go the slow-go and the no-go  

years. So your go-go years are right after you  stop working you're young and healthy and you're  

eager to go out and do all of those things you've  dreamed about doing but you might start slowing  

down some and eventually you get to a point where  you don't want to sit on an airplane for eight  

hours and your health care costs start to rise  as you spend less on leisure and entertainment.  

Another big piece of all this is any retirement  income that you get so that's Social Security  

or pensions and Social Security is a big piece of  retirement income for a lot of people in the u.s  

so we're going to lean on that as we go through  this if you have roughly $500,000 saved for  

retirement then we're going to assume that you get  a bit more than the average here because you've  

had the earnings and the work history to help you  save some money your age also affects how much you  

get from Social Security, so that can impact  your plan you really want to do some analysis  

and make some decisions keeping in mind that you  may have beneficiaries who might take over your  

Social Security benefit. By the way, I'm Justin  Pritchard, I help people plan for retirement  

and invest for the future. So, in the description  below, you're going to find some resources on this  

topic, and I'll include some links to calculators  that you can use to run your own numbers.  

So we'll start with a single person example  and then get into a couple, and these are over  

simplified examples but the important thing is to  paint the picture of how things might unfold and  

show you how you can run some of these numbers  yourself. We looked at some of those statistics  

on spending and if you're going to retire with  $500,000 in assets unless you have some really  

great retirement income you're probably not going  to be on the high end of those statistics so we'll  

assume somebody here spending about 45 thousand  dollars per year going to get 2 000 a month  

of Social Security income so we'll put those  numbers into our handy calculator here 45 000  

of spending or income we're going to ignore  taxes for right now but we'll get to that later  

and she gets 2 000 a month in Social Security that  leaves 21 000 that she's going to need to withdraw  

from savings each year now you can play with an  inflation rate and of course inflation is higher  

right now the question is will it remain high  for the rest of your life for the next 30 years  

or something that would be interesting if it did  so I'm just going to go with this for right now  

and one year away from retirement let's  say five and a half percent returns  

both before and during retirement and 25 years  of life maybe 30 years of life if we look at  

the calculations there this person needs about  457 000 so depending on how much she has if you  

already had 500,000 you might be all set however  again this is an oversimplification so we have  

ignored taxes let's assume that all of that money  is in a pre-tax retirement account you're going  

to have to pay some income taxes when you take  withdrawals so one way to look at that is just to  

increase again this is an oversimplification but  you might say let's call it 50 000 and assume  

roughly 5 000 in taxes each year and what might  that mean well that might mean you need an extra  

65 000 above the 500 000 you're thinking of  another issue is that this assumes flat returns  

each year and the fact is that you're never going  to get exactly five and a half percent some years  

you'll get five, some years you'll get six, some  years you'll lose money, some years you'll earn  

more, but they typically don't go in a straight  line so we have to wonder what would happen if  

you have bad timing for example if there's a  big market crash right at the beginning of your  

retirement. To help paint a richer picture  of that let's look at a financial planning  

program that's a little bit more robust so this  is saying that she might have roughly a 50-50  

chance of success and I've got some tricks to  improve that but just for starters that's more  

or less a coin toss so what does that mean  if there's a 50% chance of success this is  

a Monte Carlo analysis and so what happens is  we might say that you get a thousand different  

hands of cards. Some of those are really good  those might be the ones up here that leave you  

with a lot of money at the end of your retirement  or the end of your life some of them are really  

bad and you would run out of money early and in  roughly 50% of these cases you end up just making  

it you're probably not going to get the best luck  as you go into retirement and hopefully you don't  

get the worst luck but we want to be able to  account for a number of different ranges here so  

that if things are kind of bad or pretty bad that  you have a decent chance of making it so what can  

we do to improve those chances of success one way  is to adjust spending so if you're flexible then  

you can reduce what you spend in years when things  are really bad or you might even look at something  

like the retirement spending smile which is based  on some research from David Blanchett which says  

that retirees might spend it roughly inflation  minus one percent now this has her with a 100%  

chance of success which i don't like nothing  is 100% certain i wish it would stop at 99%  

but just by making that little adjustment this  has dramatically improved the chances but it's  

not something you can do on one of those basic  online calculators just to look at a little bit  

more detail on how this might unfold by the way  this doesn't perfectly match what we looked at  

in the basic online calculator but  it's close enough for our purposes  

so they have about five hundred thousand dollars  here she's going to work for one more year then  

that income stops she's going to wait until age  70 to take Social Security so there are a couple  

years there with zero income and then a partial  year then that full Social Security benefit  

kicks in of course it's inflation adjusted so  it's actually higher out in the year 2029 those  

expenses are right around 45 000 when she stops  working and there's that five thousand dollars of  

taxes due so in these first couple of years  when she has no income she's going to be taking  

pretty big withdrawals to support her spending  but once that Social Security income kicks in  

then she can take much smaller distributions and  that tax bill is going to come down and we can  

take a look at that if we look at what her tax  rate might be this is an effective tax rate so  

this takes into account any deductions that you've  taken, uh, typically people pay surprisingly low  

taxes especially if you're at this asset level  in retirement roughly $500,000 in savings if  

you have a couple of million you're going to be  in higher tax brackets especially later in life  

once you start taking those required minimum  distributions but at this stage and with this  

asset level the tax rates can be surprisingly low  for some people so that was our single example and  

now we can look at a couple but I'm not going  to go through all of those steps again they've  

got two sources of income coming in so that makes  it a lot easier to support higher spending levels  

so let's jump over to the quick calculator just to  see how that looks so they wanted 50 000 of income  

or spending they've got 35 000 of Social Security  coming into the household so that's only 15 000  

they need to generate out of their assets let's  throw on a little bit extra just for some taxes  

and other things so we'll keep all of the other  assumptions the same and it's a 30-year retirement  

here they can also make do with less than 500 000  again ignoring some taxes and bad timing and other  

things that might pop up as surprises but with  a really simplified calculation they're at least  

kind of in the ballpark with about 500 000  in assets of course it's important to plan  

for one person's death and that might happen  sooner or later so you want to look at how  

that might affect the household as you're doing  these ballpark calculations another thing you  

can do is look at a withdrawal rate again it's an  oversimplification but it's a way to kind of take  

your temperature and just see if things look way  out of whack or if they look more or less okay  

so in this case we've got them pulling 20 700 out  of their assets and that's based on let's call it  

$500,000 of assets so if we divide that we get  4.14 percent is the withdrawal rate that these  

people are taking the great debate is always  going to be what is the right withdrawal rate so  

the anchor point for a lot of people  has been a four percent withdrawal rate  

otherwise known as the four percent rule which  is a bad name for it it's really more of a four  

percent research finding and that's based on some  research done long ago to try and figure out what  

is the maximum amount that people could withdraw  in really bad situations with historical data and  

pretty simplified portfolios that happened to be  four percent now if you look at that and you use  

a more diverse portfolio it could potentially  be higher however a lot of people will say that  

given today's environment with low interest rates  and wherever the market is a lot of people think  

that four percent is too high this is something  that people can quibble about for hours on end  

so I'm not going to try and tell you what is your  correct withdrawal rate i actually prefer to do  

more detailed calculations like with the financial  planning program i tend to find that that's more  

helpful but it is often useful to figure out if  you're looking at a six percent withdrawal rate  

you might want to make sure that you have a  backup in place or you have a good reason for  

withdrawing a lot versus a one or two percent  withdrawal rate you have to wonder if you are  

selling yourself short once again any flexibility  you have in retirement is extremely valuable so if  

you're able to change your spending in response to  how the markets do if you are running out of money  

more quickly than anticipated then that is super  helpful and maybe you can retire sooner or maybe  

you can start with a higher withdrawal rate versus  if everything is rigid and you're running pretty  

thin then you want to go with a lower withdrawal  rate because you don't have a lot of cushion to  

adjust to life surprises so just for reference  here we're looking at some data from JP Morgan,  

their research on withdrawal rates and different  portfolios and when might you have a relatively  

high level of confidence when should you be more  concerned and they give you a rough idea what I  

like about this is it doesn't just point at one  number it gives you some ranges and you can say  

well I'm comfortable with certain ranges I'm good  with green i don't like anything less than dark  

green or you can say I'm willing to dip into some  yellow because i want to retire sooner and I'm  

willing to take chances and especially maybe i can  make adjustments if things aren't going well so  

what about taxes we said we talked more about that  and taxes are important this is going to reduce  

the amount of money you have for spending you need  to budget if you're going to be taking withdrawals  

from pre-tax retirement accounts because some  of that money needs to go to the IRS the amount  

you actually pay is going to depend on a number of  different things and again if it's all in pre-tax  

accounts you're going to have a relatively higher  tax burden versus if that money is in Roth IRAs  

and you satisfy all the requirements to get  tax-free income so there could even be some  

opportunities to do planning before you retire or  before you start taking social security benefits  

and there might be ways to reduce the amount  you pay in taxes Roth conversions are an obvious  

example of that now since we're talking about  taxes it's time for a friendly reminder that this  

is just a short video it's not individualized  advice it's not enough for you to make some really  

big detailed decisions on the rest of your life  so please check with some experts work with a tax  

advisor financial planner and triple check those  calculations if you're doing all of this yourself  

because we don't want you to run out of money  early now this is just an oversimplified example  

of what things might look like to help you  visualize what the tax impact is so at this  

point the person is taking social security  we've got that single person example again  

she gets 24 000 a year in social security so  that means she only needs to pull out 21 000  

from those pre-tax retirement accounts for  ignoring state income tax and other factors  

her tax burden is relatively small however it  still takes a bite out of things and so if she was  

thinking she has 45 000 of income that  social security plus the withdrawals  

what ends up happening is she has slightly less  so she needs to either make up the difference  

or pull out additional funds a lot of people ask  about living off the interest or just not dipping  

into the savings but spending the earnings and  the dividends that come off of their investments i  

get where that comes from perhaps you want to keep  some money around for a health care event or maybe  

you want to give assets to the next generation  or to your favorite charity certainly makes sense  

the reality unfortunately is that for people who  have about 500 000 saved for retirement is that  

those people are typically going to have to spend  from their assets so what's important is that you  

make sure you don't run out of money before you  run out of life that goes back to some of those  

planning questions and looking at a withdrawal  rate that is going to make it likely at least  

that you don't run out of money and remember that  if you do run out of money you might still have  

some social security income and other resources  available but we really want you to be comfortable  

and have assets to draw on for the rest of your  life a couple of ways you can improve your chances  

are you can explore different products i don't  sell annuities and they can certainly be misused  

but an immediate annuity for example can pay you  income for the rest of your life and it's pretty  

simple and inexpensive you certainly don't want  to put all of your money into something like that  

but it could help if you are driven by a need  for security other techniques like buckets or  

time segmentation could also help you improve  your chances there are a lot of different ways  

to go about this it just depends what feels right  for you and if you're fortunate enough to own a  

home and have some equity in it then that may  be available for you down the road to help cover  

some needs if some surprises come up so as  you're figuring all of this out what can you  

do to improve your chances of success there are a  lot of moving parts but that means there are a lot  

of opportunities to make little adjustments that  can improve your chances remember those retirement  

spending strategies so that's the go go slow  go and no go years where you might reduce your  

spending by a certain amount as you go through  each phase or that retirement spending smile  

which goes slightly slower than inflation but you  might want to have certain categories of spending  

that go faster than general inflation like health  care expenses and in the category of least popular  

solutions there is working longer now this could  be something that helps you continue to save money  

and if you're able to maybe spend more on the  things you love then maybe you can keep working  

not a lot of people want to do this but it is  really powerful that's because it shortens the  

number of years that you take withdrawals plus  it can help your social security or your pension  

benefit or both because you've got more years of  earning possibly higher earnings and you tend to  

claim at a later age which typically helps your  benefit the drawback of that one I don't need to  

tell you is that you have to keep working longer  but even one year or a partial year can make a big  

difference and take your time as you evaluate  social security and other decisions like that  

because when you claim can have a big impact  on what your income looks like and it can also  

open up opportunities like leaving some of those  lower income years to make Roth conversions and  

you certainly want to remember inflation and  health care surprises as you go through all  

of this because those can have surprising impact  on things and health care is something that it's  

kind of crazy we go into retirement we don't know  how long it'll last we don't know what health care  

issues will come up so it's really difficult to  predict but those costs can really add up if you  

get into let's say an Alzheimer's and memory care  type situations so just think about those things  

even though it's not fun think about what might  happen if those situations were to arise. So I  

hope you found this helpful. If you did, please  leave a quick thumbs up, thank you, and take care