Can you retire at 60 with $500k? It's a big question and actually includes several other unspoken queries. Namely, can you amass that much money between now and the time you turn 60, a traditional "early" retirement age?
Also, if you're not sure whether you can create that much wealth, what's the best way to find out how to start doing it? Finally, the other related question is, how much would you have to start putting aside each month to reach the $500,000 goal by age 60?
Oh, where does that $500,000 figure come from? We chose it because so many financial texts use $1 million instead, which is a bit unrealistic for most working adults, especially those who are a little late to the "saving for retirement" party.
Where Do I Start?
The best way to approach the question, "Is $500k enough to retire at 60?", is to break it up into smaller pieces.
So, let's begin by looking at the universal formula for figuring out not only what you'll need for retirement but also how to make a retirement budget, how to use something called the four-percent rule, how to make a decent estimate of how much you can save before age 60 arrives.
Finally, we'll look at how to calculate social security income and, most important of all, how to hedge against inflation so that your retirement savings do not get nibbled away by rising prices.
The General Formula
What some often refer to as the "general formula" is not a complicated mathematical equation. It's simply the primary way to find out what your future savings would need to support the comfortable lifestyle you desire to have after retirement. Here's the standard way to look at it.
There are several pieces to the puzzle, starting with how much you currently earn and spend, how much you have the ability to save each month realistically, what you will spend each month after you retire, and what all your sources of income (including access to savings and retirement accounts) will be after you turn 60. We've chosen age 60 as the "retirement age" for this analysis.
Even if you have a plan to work until age 65 or later, it's safe to use 60 for calculating because you might be forced to retire early or be sidetracked by an illness or disability. So, the age-60 assumption is a conservative way to approach the planning.
And, don't neglect the fact that you probably don't know how much you'll be earning between now and retirement. So, keep in mind that there's a good amount of guesswork involved when we're doing the following calculations.
For example, if you're 25 years old right now, can you say for sure what your monthly income will be 20 years from now? Of course not, but don't worry. It's still possible to arrive at a solid plan for amassing $500,000 or whatever you will need by the time you stop working.
Making a "Retirement" Budget
Here's the step that takes a little bit of pondering. Making a retirement budget means writing down, in as detailed a form as possible, what your monthly spending will be after age 60. For most adults, that number will be lower than it is now, simply because you'll likely have (or be close to having) your house paid off, have less debt, and won't be as active as you are now.
Look at your current monthly spending and go through it line by line. For each item, determine whether you'll be spending more or less after age 60. You should also look at each line of the income section, though this tends to be much less complex than the expense side. People have far fewer income sources than they do expenditure categories. That's just one reality of life.
So, after doing the line-by-line analysis, try to put together a post-retirement budget that seems realistic. Don't fret because when you meet with a financial planner, they'll show you how to get really close to a realistic retirement budget by using estimates based on national averages. For instance, most families and individuals spend about 20 percent less during their retirement years than they do while working.
Say you currently spend about $5,000 per month. It's safe to say that after retirement, you'd need $4,000 to maintain the lifestyle you now enjoy. So, forget about income for a moment and just focus on that number. Will a $500,000 nest egg, without any other income source, be able to sustain you for 20 years after you quit working? Using raw math, it would just barely make the cut because the 20-year cost of living for you would be $480,000.
However, that ignores factors like inflation, other sources of income, surprise expenses (like a major illness), and the distinct possibility that you will live past the age of 80.
The Four-Percent Rule
The four-percent rule is an excellent way to deal with some of those questions we just raised, like how to deal with living past age 80, a medical crisis, and more. The rule is that you should only withdraw four percent or less of your retirement money each year. If you have $500,000, that amount is $20,000. But, wait. If your annual expenses are $48,000, where will the other $28,000 come from?
The great majority of retirees come from pensions, 401k plans, IRAs, and social security payments. In the example above, the person would need $28,000 from those sources to cover the deficit if they followed the four-percent rule. A married couple who each receive $1,166 per month in social security income would make up the deficit exactly.
This scenario is why people need to examine factors like inflation, how much they're likely to receive in social security, set up IRAs, and use precious metals to keep inflation at bay. It's a fact that not everyone receives social security in an amount large enough to cover their post-retirement expenses, even if they have a relatively large nest egg of $500,000.
So, how can you make up for the difference now?
Calculating Future Savings
Suppose your situation is exactly like the one discussed above? Assume you have everything in place to receive, along with a spouse, a social security payment of $1,166 per month. What's left is for you to come up with the $500,000 in additional retirement savings. Now, let's make a few more assumptions: your current age is 35, that you have some wiggle room in your budget to bump up the monthly amount saved, and are willing to make a few lifestyle changes to reach all these goals.
Again, we're assuming a lot, but an in-person or online consultation with a financial planner can take all your precise details into account. That way, you won't be doing much guessing or making wild estimates. In any case, let's continue the example here, for educational purposes, of course.
You're 35 and need to save $500,000 by age 60. Your best guess of a social security payment of $1,166 per month is what will be added to the $4,000 you withdraw from the $500,000 each month to meet monthly expenses. The question, then, is this: What does a 35-year-old person need to save each month from the family budget to have $500,000 25 years from now?
There are several ways to find an answer, but the best way is to use an online calculator that tells us the present value of a future sum of money, making assumptions about what you would earn in interest each year on the saved balance. In this case, a 35-year-old person would need to save about $850 per month, assuming a five percent rate of interest (growth), and monthly compounding of the interest. By age 60, you'd have just over $506,000 in your account.
Note that the amount of interest you earn and the number of years you have left before turning 60 are two significant figures in the calculation. The higher the interest rate you can get, and the more years you have until turning 60, the easier it is to save $500,000 or any amount of money.
Compound interest is a tricky thing. In the short term, it does not seem to have a substantial effect. But, over many years, even a tiny change in the interest rate can make a massive difference in the final amount in your retirement savings account.
Estimating Social Security and Pensions
In addition to a retirement account of $500,000, millions of working people have employer-based pension or 401k plans or IRAs (individual retirement arrangements) that add to the total amount of money they have available for spending after age 60.
How can you estimate the size of these income sources? For employer-based plans, you can speak with a representative where you work and get a very good estimate of what to expect in monthly income. For an IRA, it's best to talk with a financial planner or use an annuity calculator online to arrive at a figure for monthly payment from the account.
But what about social security? Some people don't have a clue about what to expect. The good news here is that you can contact the Social Security Administration or visit their website, www.SSA.gov, and see what your monthly payout will be once you retire. Note that, depending on when you were born, your "full retirement" age, according to SSA, will vary.
However, once you understand the dollar amount, you will receive from a pension, a 401k, an IRA, and from social security, the mechanics of figuring your future lifestyle finally comes into focus.
The point of all these mathematical gyrations is to ultimately discover how much money you need to save each month, right now, to amass $500,000 by the age of 60.
Hedging Against Inflation
What is inflation, and what does it mean to "hedge" to fight against it? It's a question you don't hear often enough these days but is essential to understand and ask if you want to learn how to retire comfortably.
Simply put, economists define inflation as an overall rise in the general level of prices within a locality or nation. It's really the enemy of savers because when prices go up, the value of your savings dollar goes down. For retirement planners, inflation is the big question mark because no one can say for sure what inflation will look like five, ten, or more years from now.
So, where does hedging come in? Hedging is a financial strategy that can help you overcome the ill effects of inflation. For example, the price of gold tends to rise in bad economic times. There are dozens of reasons for that phenomenon, but one is that people tend to look at gold (and all the precious metals) as a "safe haven" kind of investment.
So, if prices begin to rise rapidly and the value of paper assets like stocks, bonds, and mutual funds starts to erode, savvy consumers buy gold as a way to avoid or "hedge" the effects of inflation. When inflation rises, the prices of gold, silver, platinum, and palladium tend to as well.
The current economic climate in the U.S. is a recipe for long-term inflation. The Federal Reserve Bank continues to print vast quantities of paper money, which is one of the critical factors that stoke the inflationary cycle. So-called "quantitative easing," which economists call "money printing," is not likely to stop anytime soon if history is a reliable guide.
Governments worldwide, and the U.S. government, in particular, can't seem to get out of the habit of covering each year's budget deficit and economic ills with money printing. The technique works for a while, but eventually, inflation catches up with the money-printers, and they see no way out except to print more.
Eventually, this creates a situation where the national debt is astronomically high, a sign of a very unhealthy economic system. By the way, as of right now, the current U.S. national debt stands at $28.2 trillion.
Who suffers the most from inflation, money-printing, and high national debt levels? You, and anyone else who wants to put money aside for the future, for retirement, or just for a "rainy day." Inflation and high national debt tend to devalue the currency, in this case, the dollar.
The Role of Precious Metals
Finding a way to avoid or hedge against inflation is vital for any person who aims to provide a comfortable, financially secure retirement. A precious metals IRA is one of the most effective ways to beat inflation and save for the future at the same time. These special accounts can hold physical metals, have the potential to offset the effects of inflation, and are great for retirees.
The best part is you can decide to transfer funds from a traditional IRA directly into a precious metals IRA. Instead of cash and paper assets like stocks, the precious metals IRA holds physical metals like silver, gold, palladium, and platinum. Taxes are deferred until you make withdrawals, and you have the potential to nullify the negative impact of inflation.
And, maybe it all sounds complicated, but the good news is that it's simple to set up a new precious metals IRA or transfer some or all of your current IRA money into a precious metals version. A licensed metals dealer can help set up your account through a custodian (who does the paperwork and oversees the account) and put the metals into an IRS-approved security vault.
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Preparing for Comfort After Retiring
Preparing to live comfortably during retirement means sitting down and crunching a few numbers. Of course, you can always hire a professional financial advisor to help you. But it's still a good idea to do the preliminary work on your own.
That way, when you visit with an expert, you'll already know most of the general parameters of your goals. You will have dissected your budget to the point that you're very familiar with how much you can afford to set aside.
The other thing you'll get out of this exercise is an explicit knowledge of how to protect your savings long-term from the ravages of inflation. For most working adults, a precious metals IRA offers the safety and security that only comes with the financial soundness of this class of unique assets, namely the precious metals family (gold, silver, palladium, and platinum).
Learning how easy it is to set up a PM IRA is perhaps the best first step anyone can take toward the goal of having enough capital to live well after the age of 60, regardless of what happens with the global economy or the stock market.