I was listening to Wes Moss on his podcast yesterday. He was reviewing a survey of retirees who claim to be the happiest and he made a statement that I found surprising. According to the survey results the happiest retirees had at least $500,000 in liquid assets. Meaning stocks, bonds, CD’s, savings accounts, REIT’s and/or cash. Not $500,000 in net worth, which can include house equity, possessions, land, etc., but just things you can turn into money quickly. In other words the happiest retirees have a half a million dollar retirement nest egg, or larger.
I don’t know about you but I found that surprising. If you use a rule of thumb like the four percent rule then retiring with half a million dollars invested means you can only withdraw $20,000 a year the first year and then $20,000 plus inflation in future years. $20,000 isn’t a whole lot of money to cover housing, food, transportation, medical care and all the fun things I want to do in retirement. In my case I retired with considerably more than that and still don’t feel like I am wealthy.
So how can that be? Wes is one of the most credible experts I know of and I do not doubt that the information is correct. But how? One thought is that many happy retirees do not live only on the income their portfolio throws off. They may have a part time job that supplements their income and also adds purpose to their lives, I think that is very common. In fact I did that for the first five years of my retirement to ease into a non working lifestyle. If a retiree makes another $25,000 on the side then instead of trying to make it on just $20,000 they would have $45,000, which is a much more livable number. Particularly since these same “happiest” retirees also reported they had little to no debt, including their house mortgage.
Get rid of your house payment and life gets more affordable for certain. You also no longer need to invest, so that money you were putting into a 401K or other retirement accounts isn’t needed any more. No more daily commute to a distant office saves wear and tear and fuel for your vehicle or train fare. Much less need for business casual or in some cases dressy apparel to satisfy the office dress code. Much more time is available for DIY repairs or yard care, that can save a bundle of money. There are also sometimes pensions and in most cases Social Security.
As I’ve shown before Social Security often provides much higher benefits than most people think. It’s typical to see people state that the average Social Security benefit is only $1,500 a month. But they don’t go on to say that there are usually two people drawing the benefits if they are a retired couple, so that adds up to $3,000 a month or $36,000 a year. And even if one of them never paid much into the system they still automatically qualify for half of the other spouses benefits, which would be a total of $2,250 a month or $27,000 a year in retirement income. And that income is totally or partially tax free. I’m not drawing my Social Security yet but in four years when I do, my wife and I will get over $70,000 in today’s dollars according to the Social Security web site. That’s a lot of money in a low cost of living state like Arkansas where the median family income is right at $50,000. In our case if we were using the four percent rule and had exactly half a million dollars invested we would be able to spend $90,000 safely each year and increase that amount right along with inflation. We could do that for the next thirty years with a very high probability that we’d never run out of money. So in a way my family is evidence that $500K is enough in invested assets to fund a rich retirement.
Medical costs are another reason that people think they’ll need millions to retire safely, but when you are on Medicare, other than the premiums, there are not a lot of expensive costs. Much of the time my prescriptions are free because my supplemental insurance covers the cost. As far as expensive procedures go, I’ve personally racked up over $400,000 in medical bills in just the last year. Total cost to me was maybe three hundred dollars. Fortunately that is behind me, but the point is that even with very bad luck in terms of needing expensive care, the system covered me completely. Maybe I just got very lucky but the coverage seems excellent and affordable to me.
Also for someone to have accumulated half a million or more in investments they have practiced intentional good money habits for a long time. The median retirement investments of 65 year old Americans is only $88,000. To have half a million puts you at almost six times that amount. You don’t get there by accident, it took years of discipline and living below your means. After living with smart money habits your whole adult life you are not likely to suddenly become ridiculous over spenders. So because you’ve always lived within your income that habit is very naturally carried into retirement which makes raiding that half a million dollar nest egg very unlikely.
I also started thinking about the retired people I know. Most of them are pretty happy and I know enough about them to know most don’t have millions of dollars, but they probably do have half a million. That supports what the survey showed, because most retired people I know are happy and most are not millionaires, at least in terms of investments. The survey makes me feel better about the outlook for retirement for many people. I do worry about those with only the median amount invested of $88,000 or less. I suspect those are not the happiest retirees, because they have almost no margin. $500,000 is an achievable target for a great many Americans, and not nearly as daunting as some other numbers I’ve heard that range from one to five million as the bare minimum needed.
So considering that happy retirees have more than one source of income, have learned to control their expenses, have a reduced cost of living, have no or a managably small amount of debt and have affordable government provided health care, I believe that having a $500,000 retirement nest egg is enough for them to be financially secure.
What about you, are you buying into the idea that half a million dollars is enough in investments to fund your happy retirement?
Why do so many people feel like they need much more than that to be safe in retirement?