“Realistically, no one is going to spend $100,000 a year in retirement.” (Photo subject is a model.) – Getty Images/iStockphoto
The amount of money people need to save for retirement keeps increasing, and I don’t like that. I’m also very skeptical. Some say you need $5 million to retire; some say you need $5 million to retire. Some say $1 million; others will give a number in between. I’m very skeptical of these numbers and wonder what assumptions they make about how you’ll use your money.
Since his goal in life was not money, he retired with $750,000 — and he was doing fine. Do you know why? Because he purchased two mobile homes and a 2.5-acre piece of wasteland some time ago and started renting them out before retiring. In addition to being a landlord, he invests some of his money in income stocks.
He found low-effort ways to make money. He bought a cheap car, fixed it up and resold it, making a $1,000 profit. He used to run a programming company with my father. They made a little money but gained experience. This may have helped him get accepted into the lab. Some even still ask him to reprogram them and pay him thousands of dollars.
He also doesn’t spend much. He doesn’t own a luxury Tesla; he owns a $5,000 Prius. The only reason he spent more money on a car was because my grandma really wanted a practical car. The rent on their garage covers their property taxes. Except for special occasions like birthdays or holidays, they don’t eat out and live a comfortable, low-cost life.
They walk for 30 minutes every day to stay healthy. My grandma loved shopping, but she did all her shopping at thrift stores, so their shopping and entertainment bills remained low. So my grandpa didn’t get much social security, but he made social security work because he used his money wisely.
The American dream is to make six figures and buy a house. If you have $2.5 million in a money market account with a 4% return, you can earn $100,000 per year. Realistically, no one is going to spend $100,000 a year in retirement. The average American spends $78,500 per year. This means that, without interest, $1 million will last approximately 12 years at this payout rate.
The question is, really, how much money do we have—or how much do we spend? I dare say that if you spend your money in the right places and are careful, you could even retire at age 55 with $500,000 and be fine. Am I right? Of course, it is also good to enjoy the fruits of your own labor and spend some money on leisure.
Did I miss something big, or was my suspicion right all along?
skeptical readers
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On the face of it, it would be difficult to retire at age 55 with $500,000 in income. – MarketWatch Illustration
I’m on #teamgrandpa. He did a lot of things right.
He achieved three valuable things: He worked until he was 70 years old. He found ways to make extra income, including renting a mobile home to make extra cash and continuing to freelance for his old company, a job that stemmed from his willingness to take risks and experiment and make money with his assets. And its cost is very low.
It’s difficult to retire at age 55 with $500,000, although that’s a lot of money, although again it depends on your lifestyle and where you live. You have to consider health care costs, utilities, transportation, rent/mortgage, and property taxes. You can also explore a substantially equal period payment plan (SEPP) or adopt the Rule of 55.
A reminder to readers: The “age 55 rule” is an IRS provision that allows you to take penalty-free withdrawals from your current employer’s 401(k) or 403(b) if you leave your job in the year you turn 55 or later without incurring the 10% early withdrawal penalty. A SEPP is an IRS-approved periodic withdrawal of funds from retirement accounts such as 401(k)s and IRAs.
On the face of it, it would be difficult to retire at age 55 with $500,000 in income. If your health is good, the money will need to last 35-40 years, and inflation will erode its value over time. Using the 4% rule, that would provide $20,000 per year (or $1,670 per month), especially considering that Medicare eligibility doesn’t kick in until age 65.
You make a good point about whether you need $1 million in retirement, as many surveys indicate, and also point out that $1 million is not enough. It all depends on your lifestyle, whether your income exceeds your expenses, and how much you’re willing to cut back on all those extra expenses, from coffee and streaming services to eating out.
Related: I’m 80 years old and have $1 million. How do I prevent my son from being subject to estate tax?
In these pages I wonder if people are wasting their retirement eating out. All the pizza and spaghetti bolognese add up, as do the extras like drinks, sides and desserts. Studies show that people spend between $1,990 and $2,500 a year on restaurant food and up to $3,640 on takeout.
In fact, Americans spend almost as much on dining out ($1.5 trillion per year) as they owe in student debt ($1.8 trillion), according to the Department of Agriculture. Total food spending exceeds $2.63 trillion. Taking these dining out figures at face value, if you start counting at age 25, you’ll have spent $123,750 by age 80. Or more than $200,000, including takeout.
So, yes, I agree with your grandpa. He moved from missionary work to the corporate sector and in the second half of his career made enough money to balance the books in retirement (also known as “making ends meet”). This requires creativity, intelligence and gumption, which I believe your grandfather definitely had.
There are other obstacles and/or forks in the road that people face as they retire, including progressive deterioration in health that may lead to the need to live in an assisted living facility. It also costs money (up to $100,000 per year or more, depending on the facility and location). Without long-term care insurance, retirees often dip into their home equity.
Saving requires cutting back on spending, and saving is just as important to a comfortable retirement as investing in a 401(k), IRA, or taxable brokerage account. I absolutely love shopping at thrift stores. (I just bought a pair of Dr. Martens boots in New York to help me survive a snowstorm.) After 65, the freedom to travel if you can afford it is also a bonus in retirement.
A healthy retirement fund rewards you with this.
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