How to Retire on 500K with the Greatest Potential



retire on 500KWhile I was browsing through the search terms that lead people to my blog, I noticed that “retire on 500K” came up more than once. Unfortunately it lead them to one of my past blog posts called Retiring on the One-Million Dollar Myth which doesn’t really specifically address the question (the post was more about reviewing what your individual needs during retirement will be).

Feeling a little bit guilty for not providing them with some definitive advice they could use, I decided to give them what they were looking for and start a fresh new blog post – this one!

While I am certainly NOT in any way a financial advisor (big disclaimer!), I’d still like to take a regular guy’s approach at answering the question of how to retire on 500K. I realize for many people that saving up $500,000 will not only be a huge challenge, but it will also be the reality of what their maximum nest egg size may grow to be. No matter what your situation is, I’d still like to help you by exploring the options and making the most of them.

 

Is It Really Possible to Retire on 500K?

I think the short answer is yes.  But let’s be clear: It’s not going to be pretty or easy.

Although $500,000 isn’t an incredible amount of money, I think it is basically possible to retire on any dollar figure. You just have to know what you’d be getting yourself into first in terms of what you can afford and how long your money will last. As you can of course guess, a person who retires with 4-million dollars will have a much different experience that someone who decides to retire on 500K.

 

How We Won’t Retire on 500K:

I wish it was a few years ago (or even the 80’s) when interest rates were up. If they were, then this exercise would be really easy because all we’d have to do to retire on 500K is either buy a high yield fixed income annuity or a few long-term government bonds.  Done!

But … that was then and this is now. Unfortunately interest rates are currently pretty pathetic; not to mention that both of these options will be chiseled away by income taxes. So we’ll have to try harder.

 

The 4 Percent Rule:

First things first, let’s assume that your 500K retirement money is safely stashed in a conservative tax-sheltered portfolio of low cost stock and bond funds that follow their respective Index funds. If we do this, then we know we have a good chance of making somewhere between 6 and 8 percent on average each year.

Following traditional advice and the safe retirement withdrawal 4 percent rule, we know that we should be able to pull out at least 4 percent each year with adjusts for inflation, and this should last us for about 30 years. However, 4 percent of 500K (the principal) is only $20,000 per year ($1,667 per month). For the best tax efficiency, we should have been keeping the money in a Roth IRA so we can avoid paying any future taxes once we start making withdrawals after age 59 and a half.

• Retire on 500K Result: $20,000 per year ($1,667 per month) with inflation adjustments and no income taxes due.

I don’t know about you, but that doesn’t sound so great! With such little money, I don’t want to run out. So let’s try something else.

 

Retire on 500K

A Roth Full of Dividend Stocks:

Is there a way we can retire on 500K without draining our principal? The answer is yes – dividend stocks. The great thing about taking only the dividend payments from your stocks is that it won’t matter what the value of the actual stocks are as the years go on. Think about it:

• Say your 500K is made up of 5,000 shares of stock at $100 each. A portfolio of 4% dividends would yield you $20,000.

• As long as you hold those 5,000 shares of stock and the dividend payment never gets cut, you should expect to get that $20,000 every year. All you need to do is pick good high quality dividend payers like from the Dividend Aristocrats or from the Dogs of the Dow.

• If the stock shares go down in value, then that’s okay. You still own 5,000 shares that pay that solid dividend of $20,000; so long as the dividend payment doesn’t get cut. (Technically, your dividend yield will just be higher. But that will be a moot point).

• If the stock shares go up, then that’s okay too. You’ll just continue to collect your $20,000 dividend payments and bank the rest. Hopefully, the dividend payments will rise and provide you with some type of buffer for inflation.

If you keep your money in just a regular broker account, then you can expect to pay taxes on the dividends you take out each year. So let’s avoid this!

To retire on 500K, let’s again use our Roth IRA to grow our dividend stocks and avoid paying any money on our withdrawals. The only trick is that we’ll have to wait until age 59 and a half.

In terms of inflation, strong dividend stocks should provide a natural buffer for inflation (as the price goes up, the dividend payment goes up).  We could also rebalance our portfolio ever so often to capture lower prices / higher yeilds as another way to protect against inflation.

• Retire on 500K Result: $20,000 per year ($1,667 per month) with oppertunity for inflation adjustments and no income taxes due.

So now we have better stability to retire on 500K, but we’re still only making $20,000 per year. Can we do better?

 

Combine Withdrawals and Dividends to Retire on 500K:

Why can’t you have your cake and eat it too? As a compromise for income over safety, let’s use our dividend stock portfolio AND withdraw 1 percent from the principal balance each year. Initially, this will give us $20,000 plus $5,000.

This strategy is pretty straightforward at first, but it may get complicated as the future years go on. Going back to what I said about how it doesn’t matter the value of your stocks are because you’ll still get your dividend payment – that won’t be true if you cash in 1 percent of your shares each year.  Example: If you cash out 1% of your stock shares for $5,000, you’ll reduce your dividend payments by 1% or $400.  In terms of longevity, 1 percent is well below the conventional 4 percent rule, so your money still has pretty good probability of sticking around.

Once again: If we’re smart and use a Roth IRA to retire on 500K, we can avoid paying taxes on our withdrawals.  Both of the arguements above still apply for inflation protection, but it will be a little more tricky with the combination of methods.

• Retire on 500K Result: $25,000 per year ($2,083 per month) with oppertunity for inflation adjustments and no income taxes due.

Without getting too risky, this is about as much as we can do with the principal balance. Luckily, we’ve got other money we can count on.

 

Don’t Forget to Add Social Security to Our Retire on 500K Plan:

According to Social Security online, the average Social Security benefit is $1,230 per month. If we can wait until age 62 and add this to our Roth IRA plan above, then our prospects for monthly income will look much better:

Retire on 500K Result: $39,760 per year ($3,313 per month) with oppertunity for inflation adjustments and income taxes paid only on the Social Security benefit.

Fortunately just like good quality dividends rising with inflation, we can also count on our Social Security benefit to rise with inflation as well due to a little thing called the Cost-of-Living Adjustment (COLA).

The only unfortunate thing about counting on Social Security is that for us younger people, after 2033, they think they will only be able to payout about 75% of what you should be getting. Therefore, that $1,230 might actually only be $923 each month. Hopefully our government is able to do something about this within the next +20 years.

 

Adding Additional Income Streams:

The real trick to any retirement plan, whether you retire on 500K or not, will be to supplement it with other forms of income. This opens up a whole other discussion about creating passive income streams.

Lots of people prefer to supplement their retirement with rental income from a series of rental properties. Some of us bloggers are trying to do it with blog income. There’s a ton of different ways and ideas for creating passive income. The point is that if you plan to retire on 500K, you should definitely have some sort of side income in motion.

 

Keep Your Expenses to a Minimum:

The secret to any financial situation is simply:

• Money In > Money Out

So to retire on 500K, we need to make sure that our expenses are kept to an absolute minimum. This will mean:

• Making sure your mortgage is paid off in full before you retire.

• Paying cash for a (used) car and not taking on any automobile payments.

• Not having credit card or student loan debt.

• Keeping all your regular expenses extremely (and sometimes creatively) low.

 

Retiring to Paradise:

Who says you have to retire on 500K in the United States or Canada? As you can guess, your dollar may stretch farther in a foreign country. Although I have no idea what the tax or safety implications would be for retiring to another country, there is certainly a growing trend of people who seem to be taking advantage of this opportunity. You can read about it often on the web and in magazine articles.

 

The Retire on 500K Summary:

Like I said – it may not be pretty.  But lots of people have done it and made it work for them.  There’s a blog and book about one gentlemen who was actually able to pull this off in his 30’s.  The next time you’re at the book store, take a look at Early Retirement Extreme.

So while it may not be glamorous or jet-setting, I believe it is totally possible to retire on 500K. You may have to wait until your 60’s, get creative by adding some side income, and possibly cut your expenses down to the bone. But you do have options.

The important thing to take away from this exercise is that no matter what your nest egg size is, there are some strategies that have better safety and returns than others. I encourage you to explore them and make the most of what is available!

 

Readers – If someone asked you, do you think this is even possible? How would you answer the question of the best way to retire on 500K?

 

Related Posts:

1) Will Dividend Stocks Help Me Retire Early?

2) Six Easy Steps to Figuring Out Your Retirement

3) Before Retirement, Eliminate Your Biggest Expense

Photo Credit: Microsoft Clip Art, MMD

Comments

    • MMD says

      I don’t think you’ll need as much as those calculators say either. Although I’m aiming for more than 500K, I’m also hoping to get there as soon as possible!

  1. Justin @ The Family Finances says

    There are a large number of people that retire and live off of social security alone. It certainly makes things difficult, but the point is you can “retire” on a wide range of amounts; you just have to adjust your lifestyle accordingly. I know the lifestyle my wife and I plan on having in retirement can’t happen with $500k, but I do think you “can” retire on that amount.
    Justin @ The Family Finances recently posted..Retirement Planning at a New JobMy Profile

    • MMD says

      I agree. Lots of people MAKE it work with what they’ve got. They may have to sacrifice, but they do it. But I’m with you – I think I’m going to need a lot more than $500K to get where I need to be.

  2. says

    I totally think it is possible but you should really try to hit your number to live the life you want to live. If you only have 500,000 then you wont be living in a nice house and wont be taking part in the activities you wanted to do in retirement. You can survive and get by but it wont be glamourous.
    Lance@MoneyLife&More recently posted..August 2012 Monthly Goal UpdateMy Profile

    • MMD says

      Nope! 500K means no Red Lobster and afternoons at the golf course for you! (Ha, like my idea of retirement?) 500K is basically just getting by …

  3. says

    If they’re looking for lifetime income then I’d still suggest an annuity with an income rider. There is no risk of the market whereas the dividend stocks could lose or gain value and that loss or gain will affect the amount of your dividend payment.

    Somebody could certainly retire on $500k as long as they had social security and a paid-for house.
    Jason @ WSL recently posted..Recipe: Cabbage Salad with Lemon-Tahini DressingMy Profile

    • MMD says

      Actually, if you stick with dividend stocks that have continually increased over the last 10 years, you’ll have about as low of risk as you can ask for with your dividend payments. The stock may go up or down, but your payments will remain consistent. But the idea of an annuity is not off the table. Do you know of any that are paying more than 5%? That’s basically as far as we got with the withdrawals plus dividends strategy.

      • says

        If the stock price goes down, why wouldn’t the dividend payment go down? Isn’t the payout % based on the share price?

        • says

          No, a dividend is a set quarterly amount of money. People just think of it in terms of percentage because its a better apples-to-apples comparison when you’re considering which stocks to buy. This is why picking a high quality company that rarely ever drops its dividend payout can be beneficial. Even if the share price drops, you’ll still get that attractive dividend payment and the confidence that you will keep receiving it.

    • MMD says

      That’s right. If you can keep your expenses ultra low and have no debt, it won’t take much to create perpetual income for the rest of your life!

      • Jon says

        You are absolutely right, lots live on SS and nothing else. The wife and I will both receive SS in two years, have 500k to invest and have a medium size retirement already coming in. With no debt and house paid for in 10yrs, medical paid for – (don’t forget about your medical you need) we should be setting pretty! How about an annuity to invest in?? What do you think?? Great Blog

        • MMD says

          Thanks Jon. $500K is no small achievement and you should be proud. An annuity is always a good option to explore. Unfortunately that is one area where I have done the least research so I have no good information to offer. I don’t believe I would put all my money into an annuity. But for security I wouldn’t mind shopping around for a great company that offers a strong stream of payments.

    • MMD says

      That’s awesome. Just keep checking back to my blog and you’ll learn everything you need to know! :) You’ve got the right idea – although it would be better to have more, you could make your retirement work with $500K.

    • MMD says

      It’s a good thing you know about the Roth because there is pretty much little else that compares. Other retirement accounts are helpful, but the Roth has the strongest advantages.

  4. says

    I really like how you cater a post to what people have been searching for. Now I would link your $1M retirement post here to help further.

    $500K does seem like a low amount to retire on but it all comes down to a person’s lifestyle and how much they would actually spend. Not everyone needs to live in a super nice house or do a ton of traveling. Some may be more content just living near family and enjoying the simpler things in life.
    Modest Money recently posted..A Simple Guide to Starting SavingMy Profile

    • MMD says

      Thanks Jeremy! You were the only person to notice that small fact! I’m hoping that those five people who typed that search term into Google find this post instead and get the answer they were searching for.

    • MMD says

      Thanks and welcome to the site! You’re right – your lifestyle is what is going to make the difference. If you can get a handle on your expenses and get rid of the major debt expenses, I think you’ll be okay.

  5. jefferson says

    If you have your home and cars paid off, I could see this perhaps being enough to retire on. But for myself, I certainly would want traveling to be a big part of my retirement. I woudl need to save up more than that..

    • MMD says

      I’m with you – I already know that I’m going to need A LOT more – especially if we retire early. Traveling the rest of my days sounds pretty great!

  6. says

    I definitely agree that certain things need to be in place before one can say that they can comfortably live off of 500K for retirement. I agree that a house should be paid off in order for this to happen. Also, one would need to be incredibly frugal to make it work which should be possible if you are a my money design reader ;)
    Nurse Frugal recently posted..Mortgage Payoff update 7/2012My Profile

    • MMD says

      Awwh, thanks! No matter if its 500K or 1M, I hope I can help people figure out to stretch their money in the safest way possible!

  7. says

    MMD,

    I think they key question that needs to be asked to determine if you can retire on $500k is ,”What age are you retiring at?”. If its 50, then you are going to be eating dog chow.. But someone that really enjoys their work and hangs it up at 70 or 75 might just make it.

    The wife and I want to get out early (50,55 or so). We are maxing out the savings and accumulating passive income through rentals. It should get us there.. I feel we are on target.
    Chuck @ Landlord Investor recently posted..Tenant Duration – How do you keep long-term tenants?My Profile

    • MMD says

      50 to 55 sounds like a great target for early retirement! And real estate investing is probably the way to go.

      In terms of the post, yes, 500K before you can touch your retirement savings would be a diamond in the ruff chance of success – but there are those on the Internet like Early Retirement Extreme who claim to have pulled it off. If you’ve got that little of a nest egg to work with, than I think you’re going to want to wait until you can mix in Social Security.

    • MMD says

      Thanks Shiplan! I was trying to come up with more alternatives myself, but this is about all the tricks I could think of (without getting too risky)! Thanks for the Tweet!

  8. says

    I did this when my Holi post kept getting brought up for a question it didn’t answer. Good use of stat info. :)

    These are all great suggestions on how to do it. While I agree that it wouldn’t be ideal like the other commenters, the fact of the matter is that for a lot of people right now, retiring on $500k would be AMAZING. So addressing the question is important.
    femmefrugality recently posted..Q: How Does Your Garden Grow?My Profile

    • MMD says

      It’s interesting what’s inside your stat info! I’m having some fun with that lately! Yes, 500K is not really what most of us picture for retirement. I was really trying to make it more into a game of how to get the most bang for your buck. But I agree with you – for some people, this will be it!

    • MMD says

      Thanks! It won’t be pretty, but for some people this is about the best that they’ll have to work with, and they still deserve to know what their options are. I’m hoping to save up a lot more than this and still apply the same principles to my retirement!

  9. says

    If you’re married the current standard deduction is $11,900. With that if you are taking out $20,000 from a Roth which is NOT considered income, your income is basically zero. You can draw $11,900 from your 401k or IRA tax free due to the standard deduction offsetting the withdrawal. You add that to your $20,000 and now you’re up to $31,900 tax free.
    There is a loophole in the law that allows you draw penalty free from a 401K at 55 if you reitre from a company and do not get another job.
    Conventional wisdom says leave it in there for the tax deferred benefit, but at 70 1/2 you are required to take withdrawals. When you take withdrawals with social security you will be forced into a higher tax bracket, which is a tax on social security. I plan to take yearly withdrawals so that I avoid the required minimum distribution, then convert it to investments that lower my taxes (ex: real estate, tax exempt munit bonds)
    charles@gettingarichlife.com recently posted..We’re #1…..in traffic. How much is your sanity worth?My Profile

  10. jameslee says

    The major problem with your article is this:
    You fail to mention is this for a couple, just one person, a family of four.

    Obviously for one person, then yes you could retire in probably in your 40’s.
    If it’s for a couple, then yes again but prob. when you both hit 62, bc it’s only 250k for
    each person.
    For a family of 3 or 4, forget it. Retire at normal age 65 or 66 to get full SS benefits.

    • MMD says

      I’m not sure that failure to quantify the number of family members is really a problem. I did mention in the article that this wouldn’t be the most luxurious retirement strategy. The intent of this advice was to make the best choices available if you only had $500K to work with. If you can keep working and save up more, or if you are not comfortable with this level of income, then I would keep on working until you were truly ready.

  11. says

    $500K wouldn’t cut it here in Silicon Valley, but fortunately there are many other places where $3K/month would let you live very comfortably assuming your house is paid for.

    As for other countries, most people think of the Caribbean, but if I could stand the long, cold nights (and live there on $3K a month), I’d move to Norway. Great health care, friendly people, and one of the richest countries per capita in the world. Somehow I doubt it would be like the show Lillyhammer…
    Jack @ Enwealthen recently posted..Simple Tax Mistakes You Want To AvoidMy Profile

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