I am 65 years old and will retire next year with $500,000 in savings. How much money can I spend per year?

At some point you will make the transition from building your nest egg to living off your nest egg. For many, this is not an easy transition. Maybe you haven’t reached a “magic” retirement amount yet, so are your savings enough to last? Determining how much you can spend each year can help you create a financial plan for retirement so you feel as comfortable as possible.

Don’t miss it

A $500,000 retirement savings account is a reasonable savings pool that many may still consider too small to retire on. Baby boomers think they need $990,000 to retire comfortably Northwestern Mutual 2024 Planning and Progress Study. When all American adults were surveyed for the same study, that number rose to $1.46 million.

Yet these figures are far from reality. In the Northwestern Mutual survey, baby boomers say the amount they currently have saved for retirement is $120,300. And when respondents from all generations are included, that amount drops to $88,400.

Data from the Federal Reserve’s 2022 Survey of Consumer Finances (SCF) is slightly better, with the average household retirement balance for Americans ages 65 to 74 at $200,000. But that still doesn’t meet what most Americans think they need.

How much should you spend when you retire?

Clearly, there are many 65-year-olds who retire with less than $500,000 in savings. How much can they spend per year?

A popular rule of thumb for withdrawing from a retirement account is known as the 4% rule, which aims to spread your savings over 30 years and is based on a balanced portfolio of stocks and bonds. You withdraw 4% of it the first year and in subsequent years you withdraw this dollar amount, adjusted for inflation. In the case of a $500,000 portfolio, this would mean spending $20,000 in the first year.

There are other similar approaches you can consider, such as the percentage-of-portfolio strategy and the fixed-dollar withdrawal strategy. The buckets strategy involves dividing your retirement savings into three buckets for different periods of your retirement. Something Vanguard researchers have come up with for people with a retirement horizon of longer than 30 years is the dynamic spending strategy. The website says: “This approach allows you to spend more when markets are performing well and cut back when they are not. To avoid large swings in retirement income, set a limited range for your income stream by defining a spending cap and a spending ceiling. spend ‘floor’.’

Read more: 5 Ways to Boost Your Net Worth Now – Easily improve your money game without changing your daily life

Of course, $20,000 a year isn’t much to live on. Fortunately, most retirees in the US also receive Social Security benefits. The average monthly Social Security benefit for 66-year-old retired workers was $2,499.41 in 2023, according to the Social Security Administrationwhich is an annual amount of $29,993. Combined, the two sources would amount to $49,993 per year. But is it enough?

While there are a number of ways to determine how much you will need in retirement, the rule of thumb is that you should aim for 80% of your pre-retirement income. The average annual wage of Americans age 65 and older is $58,292, according to the U.S. newspaper US Bureau of Labor Statistics. Eighty percent of this would be about $46,000.

How to stretch your nest egg

A retiree with $500,000 in their portfolio would benefit from having a budget they can stick to and looking for ways to save money wherever possible.

They have plenty of options to stretch their money, from more extreme measures (like moving to a cheaper location) to smaller changes (like taking public transportation more often instead of driving). Groceries are a major expense for most households, so having a meal plan, eating out less and checking flyers can make a big difference. Little things like canceling unused internet or magazine subscriptions, reducing cell phone bills, and skipping the muffin when buying a cup of coffee can all add up.

Although many Americans think they need a lot more to retire, $500,000 in savings can still lead to a comfortable retirement. It may be worth consulting a financial planner to help you get the most out of your savings.

What should you read now?

This article provides information only and should not be construed as advice. It comes without any form of warranty.