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?
hi steve. if you ask me social security changes everything, like you mention. i only turn 55 in the spring but mrs. smidlap is only about 2.5 years from being eligible. if i decide to pull the plug after the 1st of the year we really only need less than 3 years of full withdrawals until we need less from investments because of that annuity.
a paid off house helps tremendously in the calculations too. cheers!
You are in great shape Freddy. Yes, an inflation indexed annuity like Social Security backed by a bank that can print its own money is about as good as it gets!
“I retired with considerably more than that and still don’t feel like I am wealthy.”
My andedotal “evidence” is consistent with this statement but I think it’s due to my sample set. My data from reading various PF articles as well as casual conversations with peers has a figure between $2M and $10M NW and if we peel out to just liquid NW, it comes out to something like $1.5M to $8M. This makes the person FEEL wealthy enough that they can retire happy. I should note that these are people who have not retired yet.
I also ran similar numbers to what is stated in the article, yet I don’t FEEL secure in retirement cash flow without substantially more. But I
think us PF enthusiasts tend to be much more conservative than the general population.
That’s interesting Phillip. In my case I feel secure, I just don’t feel wealthy. Part of it is some of my friends are mega-rich, billionaires or hundred millionaire types. I feel fine about my nest egg even though it’s tiny in comparison. It’s much more than I will spend.
I’ll agree with the hypothesis. An average retiree (assuming 65 years old) that lives an average lifespan (assuming 15 more years) should probably feel pretty good. In addition to the factors you mentioned, they might not have a lot of dependents, lifestyle inflation is muted, and dipping into the principal is probably not that concerning.
Thanks Dapo, I think it’s comforting versus those who think you need five million.
“How much money” really comes down to individual preferences and lifestyle. Obviously, everyone needs sufficient income to maintain a comfortable retirement. I agree $500 K in savings should be sufficient for most couples, especially when additional income from Social Security or part-time work is added.
However, and I can’t stress this enough. Money doesn’t buy happiness. In fact, one of the greatest retirement fears is outliving your savings. Even those who have diligently prepared and set aside a million plus, are susceptible to this. Perhaps those who perceive they have enough are better able to embrace and enjoy what should be their “Golden Years”.
Good points Shannon, and that might be where $500K doesn’t quite cut it in that while it probably is enough there isn’t much of a margin to give a comfort factor. I can’t invent situations in my mind were a cushion of a few million doesn’t handle whatever comes up but if you have exactly enough then it’s easy to invent insurmountable emergencies. I agree money doesn’t buy happiiness, it’s why I have turned down several job offers in retirement.
Hard to improve upon the old classic three-legged stool metaphor: pension/annuities, Social Security, and investments, The most foundational number: understanding your expenses. The most foundational behavior: being comfortable living within your means. Not austere. Comfortable.
Maybe this:
Retirement Plan Expenses – Social Security – Pensions – Annuity income – other income [Examples: income producing property or part time work] = Gap to be covered by investment income
Gap = (4% + annual COLA) * Investments
500K in investments is either not enough or a lot, depending on your expenses and the other two stool legs.
Dave, that’s a perfect financial plan that would fit on a napkin! And for sure, none of the guys I’m going to the game with this weekend would be able to live on a $500K nest egg because they are used to spending nearly that much every year.
We’ve likely saved way more than we need, but there is no way I’d be comfortable with $500k. It is impossible to perfectly plan. Medical is the biggest issue for us as my wife is close to getting listed for a DLT (double lung transplant) caused by a 20+ journey with a rare autoimmune disease. Still 4 years to bridge her to medicare. You are on to something Steve with all the possible streams of income. With a solid foundation (far greater than $500k imo if medical concerns), social security, medicare, no debt and >60 years old … that seems like a good enough safety net.
I agree Casey, and I’ve got a lot more than $500K, but I can see how it’s enough to make most people feel pretty good. In the personal finance community we tend to be pretty financially conservative so we want a lot of margin in our retirement plans. I even have long term care insurance for my wife and myself even though we could easily self insure, but it provides a comfort factor just the same.
I agree. I actually wanted to retire once I had a $500k net worth in my 20s… That silly idea’s been quickly washed away because I love my job so much. Although with a looming recession and layoff news, I don’t know how long that’ll last…
But in either case, I also firmly believe people need less money for retirement than they think. It’s the best place to be in when you start to make money for fun and not out of necessity, too.
That’s true David, however once I realized I was well past financial independence I did become kind of hard to manage for my CEO, I eventually had to retire because the relationship wasn’t working. He needed his people to need their jobs and their incomes to have the power over them he felt he had to have, and he had lost that with me.
Oooh, Steve, that sounds a bit like what happened to me, too! My CEO didn’t take it well when he found out I didn’t have to work for him or anyone else. ??? It was a shame, because I loved the job enough to keep grinding it out. But his attitude became very unreasonable. A lose lose for everyone.
Hey Lisa, we are definitely kindred spirits! It was kind of fascinating to watch a very talented exec struggle to find a management approach that would work with me once he realized fear was off the table. There were many times I had to bite my tongue to keep from giggling when he went off at me! But you know, I’m glad he couldn’t take it because I might have not retired when I did, and retired life is much better.
I would plan for a higher number. Nursing homes can be $100,000 or more per year not covered by Medicare. It is possible to be healthy and end up in a nursing home due to a disease that is not caused by or affected by lifestyle choices.
Good to consider. Use available data to help choose a number. For example, in Texas, a private room nursing home cost in $7,305/month. (Costs vary widely by location.) Median length of stay for men is 3 months and women 8 months. Using those numbers, my wife and should plan for $80,355 total. Add a margin of error of 25%, and we get $100,443 total.
For many, this might be easily covered by home equity and not be an additional investments bucket amount.
Obviously, there are a ton of variables. But there is data available to guide one’s decision on what to reserve. Here’s two sources (there’s a lot of literature out there):
https://www.ucsf.edu/news/2010/08/98172/social-support-key-nursing-home-length-stay-death
https://www.theseniorlist.com/nursing-homes/costs/
That’s why we have LTC insurance Dave, the costs are prohibitive and you probably want to be choosy about the place and level of care you get and a private room and all that stuff. My mom and dad spent their last years in long term care but they were well prepared and their net worth increased the entire time they were there.
Bob, That’s a great example of why there is not much margin in $500K. I’ve got many times that amount and we still both have long term insurance coverage just for peace of mind.
In 2-years when I’m 61 years old, I’ve got an $85,000 annual pension coming my way. Plus, we’ll have about $800,000 in a taxable account to keep us happy 😊. Additionally, I’ll take Social Security at 70 years old that will provide my wife and I another $65,000 annually. Even if this was only $500,000 we’d be satisfied (and happy I suppose). My point is that there has got to be other funds to make retirees happy with $500k because it would otherwise be pretty tough, in my opinion. Note: We are debt-free too, including house.
Finally, we’ve also got $500k split between regular and Roth IRAs that we shouldn’t need to touch. This means it will likely be our kids inheritance (hopefully). These funds make us happy for our kids.
Heck yeah Scott, you are in an enviable situation! You literally could live a quite rich live with zero invested, although with nearly a million you have a very comfortable “emergency fund”. You’ve done extremely well, I’d say your effective net worth is more like Six million based on those income streams! And you are making a great point, those who report being very happy with that amount no doubt have additional income sources, probably not like you but still significant, you are a unicorn!
I’ll make one point in favor of $500k bringing happiness. My 90-year old in-laws would LOVE $500k. They have about $10,000 in a savings account and live off of minimal social security. $500k would change their lives for the better. We all know the horrible retirement statistics in the USA (and elsewhere) so $500k would likely change those peoples lives for the best.
Those of us who have other sources of income and higher assets would struggle with $500k because we have greater expectations for our retirement but many (most??) do not. Imagine if you are one of the people who is a retirement statistic …. $500k would be a dream come true and make them happy. These are the type of folks that answered $500k equals retiremen thappiness, in my opinion.
Exactly Scott, there are so many people with very tiny resources just getting by. $500K is an unimaginable fortune to someone who has much less. It’s a comparison game.
Hi Steve, yes 500K doesn’t seem like enough to retire with…Unless you’re retiring at 70+. I would think they’d have to have some other source of income, especially with the inflation we are dealing with now. Great post, thanks for sharing!
Thanks Soup, I agree that it doesn’t feel like enough. But it appears that it is enough to keep many retired people happy. Of course these are older people, like me, who grew up thinking half a million was a fortune. I wonder if some of it is the fact that money used to be worth more than it is now?
Hi Steve, thanks for that review. I always thought Wes Moss was talking about the 500 K as after tax then the retiree needs other means like SS, part time work, rental income, etc. to be happy. Nice how you expounded on his 500 K.
Glincoln, Wes is a real expert, I’m just a shoot from the hip type. But I did see how it could be made to work as long as everything in life ran smoothly. It’s the lack of margin that scares me. Life never stays smooth, especially as you get older.
Always cool to make a sure enough real deal bloggers list! Thanks!
Honored to be included!!
I’m a single woman, and retired 4 years ago with about 500,000 in my investments (IRA, ROTH, and brokerage) which I manage myself with a simple low cost index fund approach. I retired with no debt, and had my house and car paid off. I have some other income…about $1000 per month for the next 15 or so years. Other than that I’m bridging to SS by living on my investments. Once SS kicks in at 70 (next year) I will only need to take a small amount from my investments. I travel quite a lot, and golf a lot, but those are my only two major discretionary expenses. I’m naturally pretty frugal, since I raised four kids as a single mom, so I had to be. But I certainly spend more on myself now than before! I really can do almost anything I want, and feel I have enough to do it.
I feel good about the amount I have, not because I have much of a cushion, but because I know exactly what I spend each year, and have mapped it all out (with many contingencies) and using present value calculations, inflation, etc., to come up with a funded ratio, which is usually over 100% (it has dipped below on occasion this year). It’s tight, but my projections are very generous so I could easily tighten my belt if needed. And the equity in my paid off house is my ace in the hole if ever needed. I do my own tax planning as well, which is very helpful to keep lifetime taxes low. I’m lucky to have background in IT and accounting and feel very confident in what I’m doing.
I think the big unknown factor for all of us is whether we would ever need long term care. I have chosen not to insure for that, mainly because I have my home equity, and four children, all of whom agreed they could help me if it ever came to that.
My main point is that the more confident you are in your planning, the less you need to have to feel safe.
Golf Nut, you should have written the post because you are living a rich life with the same resources Wes detailed from the survey results. Thank you so much for making that detailed comment. Not everyone, in fact hardly anyone is able to pile up millions of dollars for retirement. It should be a comfort for much more normal folks to hear that it is not necessary to have a happy retirement. It’s clear you thought your retirement through thoroughly and are working your plan!
This article nails it. The longer I’m retired, the more I realize, a lot less money is required. As the author states, throw in Social Security, Medicare, paid off house, learned frugality and discipline, it’s all pretty much a cakewalk.
Thanks Mike, my goals were to make people with $500K feel much more confident and to make people stressed out about how they only have two million in net worth just relax a little. They are going to be fine, both groups. As long as they control their expenses to match the income streams coming in.
pensions. Current retirees 65+ tend to have generous pensions especially public sector employees.
Jim,that’s true. These are older boomers who were surveyed for the most part. My dad was bringing in $80K per year from various pensions and Social Security. That’s rapidly becoming less common, even for many public sector employees since the programs are so expensive to fund.
Thanks, thanks, thanks!!
Thanks for the mention!