Can You Retire Early With $500K? A Financial Expert Weighs In
A common financial rule of thumb is that you should have $1 million saved before retiring, but is it possible to retire — and retire early — with half that amount? That’s the question David R., a 61-year-old chemist, posed to James Conole, CFP, in a recent YouTube video. David explained that he has $530,000 saved across retirement and other financial accounts, and is hoping to retire in the next month or two.
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Here’s what Conole concluded after looking into David’s finances.
Calculating Expenses
The first step Conole took was to analyze all of the expenses David would need to account for in retirement. David does not have a mortgage, but he does need to account for property taxes, other taxes, insurance, food, utilities, transportation, healthcare and other monthly expenses. Based on David’s own calculations, he would need $2,083 per month, “but that’s literally with no wiggle room,” he said.
“Can we start adding to that retirement budget to see, what does it need to look like to more than just survive, but to to thrive, to be able to do some really fun things?” Conole said. He recommended planning for a monthly budget of $2,400 to allow for fun expenses like travel and gifts for loved ones.
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Developing a Withdrawal Strategy
Because David would be retiring early, he would not be able to begin collecting Social Security, which means that it’s likely he would have to withdraw from his retirement savings at a higher rate at the beginning of his retirement. Conole did not see this as a major concern.
“The first full year of retirement, you’re projected to take 5.4% to 5.6% per year from your portfolio,” he said. “Now I look at that and say, if you’re starting with that portfolio amount and you’re going to maintain that level of withdrawal forever, it’s probably on the upper threshold of what we’d be comfortable with. And there’s a fairly good likelihood that at some point you would need to take a cut or freeze or do something else, even just temporarily, to be OK.
“The reason I think there’s a relatively small likelihood of that happening is just because this withdrawal rate doesn’t last forever,” he continued. “You’re going to put more pressure on your portfolio in those first few years, and then pension kicks in, and then Social Security kicks in. And once those things kick in, your withdrawal rate drops dramatically.”
Accounting for Risk
One of David’s concerns is whether or not his portfolio would be able to handle downswings in the market. Conole assured him that with a properly diversified portfolio, he wouldn’t have to worry.
“Let’s assume that you had a portfolio that was 70% growth stocks and 30% super conservative short-term bonds,” he said. “Well, if there’s a really bad down year in the market, the 70% of your portfolio might be down, but those high-quality short-term bonds aren’t as subject to interest rate risk, aren’t as subject to credit risk.
“Most cases of the stock market’s dropping, those are going to increase a little bit, or at least stay relatively stable,” Conole continued. “If you have something in your portfolio like that, this doesn’t need to concern you so much. Don’t look at the portfolio as a whole — look at each asset within the portfolio and say, OK, this is what you’re going to pull from.”
Deciding When To Take Social Security
Conole recommended waiting to see how the market performs in the coming years before David decides when to start collecting Social Security benefits.
“If you’ve got a great market, you might say, hey, what does this look like if I [wait to collect] Social Security at age 70?” he said. “You’re taking a lot more from your portfolio these first several years, but then nothing, because Social Security is covering everything until required distributions force you to take it.”
On the other hand, if the market is down and his portfolio is suffering, David might want to start collecting Social Security ASAP.
“If we have a horrible down market and you’re spending more than you thought and you don’t feel comfortable with those withdrawal rates, you say, does it make sense to collect Social Security as early as possible?” Conole said. “Now, all of a sudden, your withdrawal rate never exceeds 4.1%, so it’s a way to mitigate sequence of return risk if needed.”
Conole’s Conclusion
After crunching the numbers and discussing the various situations that could occur, Conole concluded that David is in a good position to retire early.
“If this is truly the survival budget, and this is truly what it costs for health insurance, and if you’re getting the growth rate that we’re projecting, I don’t see why you couldn’t walk away from work that day,” he said.
“If expenses are much higher, if you do end up spending much more, we’d want to model some things out to say, what changes do you need to make, whether it’s saving more, working longer or cutting in other areas. But I think you’re in a good position to make that happen.”
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This article originally appeared on GOBankingRates.com: Can You Retire Early With $500K? A Financial Expert Weighs In
