According to Fidelity, the average person between the ages of 65 and 69 has a 401(k) balance of $251,400. However, add-ons like real estate, annuities, insurance, non-retirement CDs, savings accounts and brokerage accounts can add to that tally, perhaps bringing it all the way up to a half-million dollars.
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So, how much would a retiree with a $500,000 nest egg be able to spend every month without running out of money? Below we will break down the numbers, scenarios and possible outcomes.
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The 4% Rule Provides a Blueprint — With Caveats
Retirement planners have spent decades promoting the 4% rule as a guideline for gradually spending down savings. The logic is that retirees can safely spend 4% of their savings in the first year, then adjust for inflation each consecutive year.
However, Charles Schwab shared several reasons why this is only a general guideline that must be tailored to each retiree, rather than a fixed rule that can be applied uniformly to everyone. Retirees should consider the following factors about the 4% rule before customizing it to their unique situation.
It assumes a 30-year retirement window.
It assumes a 50/50 split of stocks and bonds.
It assumes that your spending will increase each year in line with inflation, regardless of portfolio performance.
It relies on historical market returns, which do not guarantee future performance.
It excludes investment fees and taxes.
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You’d Have Less Than $1,700 Per Month Your First Year
As is, the 4% rule would give you $20,000 in your first year or 4% of $500,000. That comes out to roughly $1,666.67 per month.
According to the most recent data from the Social Security Administration, the average monthly retirement benefit is $1,950.27. Adding that to the tally, a retiree with $500,000 who collects Social Security could spend a much more livable $3,616.94 per month.
How Would the Second Year Change With Inflation?
According to the most recent data from the Bureau of Labor Statistics, the current inflation rate is 2.4%. Presuming that number holds steady, here’s how a retiree with $500,000 would calculate the second year’s monthly spending amount.
$20,000 x 1.024 = $20,480
In year two, the retiree adhering to the 4% rule with no variants would have $20,480, which leaves $1,706.67 per month. With Social Security, that’s 3,656.94.
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This article originally appeared on GOBankingRates.com: What $500K in Retirement Savings Looks Like in Monthly Spending
