It Depends on Whether You’re Willing to Think Outside the Box
Today, a new take on an old story.
We’ve all seen the headlines: How much money do you need to retire?
Well, Motley Fool is weighing in this month with: Workers Think They’ll Need $500,000 to Retire Comfortably. Are They Right?
Of course, this is a facts-and-circumstance issue, so who knows? Maybe $500K is enough for someone in some particular situation.
But generally speaking, I’d say: No—$500,000 is not likely to go terribly far in retirement…if you plan on retiring in the U.S.
Now, it’s not like I need to comment on how pricy America is in general. It’s especially problematic for retirees, since they’re living on fixed incomes that do not track the real level of inflation in America.
Let’s start with some data:
- The Bureau of Labor Statistics reports that households headed by someone 65-74 spend $52,928 a year, or $4,411 a month. Those 75 and older spend $41,471 annually, or $3,456 a month. (That data is through mid-2020, so it’s still fresh.)
- The average Social Security check is $1,543 a month, or roughly $2,500 for a couple, assuming both are of Social Security age.
So, a couple in their 60s pulling in about $2,500 a month from Social Security has a nearly $2,000 gap to cover every month. That money has to come from investments and savings (or whatever side hustles they might have going).
If you have a $500,000 nest egg and adhere to the “4% Rule,” in which you supplement Social Security by withdrawing 4% of your nest egg every year, you come up about $250 short. Bump up your withdrawal rate to 5%, and you can cover your costs. But you’re stretching.
If your portfolio is largely stocks and bonds, and if we go through a crash or year after year of subpar returns (either of which is likely this decade), then a 5% withdrawal rate will un-feather your nest egg pretty quickly.
And if nothing else, you’re living the equivalent of paycheck to paycheck. You’re always counting pennies as too much month runs up against too little income.
There is a better way—but you have to think outside the borders of the U.S.
The income from a $500,000 nest egg, paired with the typical Social Security check, will allow you to live a happy, financially secure retirement in really nice places all over the world.
Want a beachy life?
In Caribbean Belize, expat couples report a budget of as little as $1,500 to $2,900 a month will do (rent and healthcare included), depending on your tastes and where you settle.
Algarve, Portugal (amazingly beautiful) will cost you about $3,300 a month, well within the pocketbook of a couple with a $500,000 portfolio and Social Security. Better yet, you face no healthcare co-pays and limited out-of-pocket medical costs in Portugal.
By comparison, Pensacola, Florida, a nice, third-tier beach city, will cost you about $4,100, right at the limit of your income. But you’re quickly underwater when you add in necessary, out-of-pocket medical costs typical in the U.S. So, you have no real financial freedom and flexibility to live an active, adventurous retirement.
City living your thing?
Montevideo, Uruguay, will hit your pocket for about $2,825 a month. Compare that to Atlanta ($5,200), Dallas ($4,800), and Kansas City ($4,100).
If you’re adventurous and you love the exotic, the vibrant ball of energy known as Ho Chi Minh City, Vietnam, is roughly $2,400 a month. In Nashville, you’re looking at $5,100.
Even in Europe you can stretch your $500,000 much farther. Prague, where I live, is about $3,200 a month compared to $6,700 for Boston (two relatively comparable cities in terms of culture, walkability, and urban living). Madrid is $3,850 vs. $6,300 in Los Angeles (two cities that share similar ambiance and climate).
Those are just a few examples. I could write a column a day for a full year comparing international cities to doppelgängers in the U.S. But it all comes back to the same point: A happy retirement is a function of feeling financially secure, and having the ability to do what makes you happy.
No one wants to feel confined by a budget that allows for little beyond the basics of living.
No one wants that constant worry, “Will I run out of money?”
No wants to always ask themselves, “Can I afford this? Can I take a trip? Can I splurge a little?”
So, to answer Motley Fool’s question: Yes—think outside the borders, and a $500,000 nest egg is plenty to retire comfortably.