Building a retirement fund of $500,000 is possible, but it requires careful planning, smart financial strategies, and, potentially, lifestyle adjustments. The initiating step is to create a budget, estimating your probable annual expenses during retirement.
A financial advisor, such as Carla Adams of Ametrine Wealth, advises that most retirees will need to replace around 70% of their pre-retirement income. This percentage is lower than 100% since there may no longer be a requirement to save for retirement once retired, taxes often decrease for retirees, and many find that their mortgage is paid off around the time of retirement.
When considering income sources during retirement, inclusion of Social Security benefits, any received annuity, expected dividends from stocks, and potential pensions from past employment is crucial. A noteworthy nugget is to try and minimize withdrawals from your investment portfolio by maximizing income sources like pensions or Social Security, which are guaranteed for life.
Following the popular 4% rule in withdrawing from your retirement savings might be a good start. The rule suggests withdrawing 4% of your retirement savings in the first year after retirement, adjusted thereafter for inflation to maintain the same dollar amount for approximately the next 30 years.
According to Adams, with a portfolio split of 60% stocks and 40% bonds, which generates an average annual yield of roughly 7%, this rule means that you could safely withdraw about $20,000 per year from a $500,000 portfolio. Reviews from financial advisors are essential to adjust the percentage of withdrawal according to your circumstances.
Adjusting your withdrawal amount during market downturns to lower amounts could protect your portfolio from rapid unwanted shrinkage. Regular reviews and diversification of your portfolio into various asset classes aid in dampening the effect of negative performance by any single asset.
A phased retirement or part-time job may help supplement your retirement income. Even an additional income of a few thousand dollars per year can make a significant impact. Other income sources such as rental income can also bolster your retirement fund.
Your retirement portfolio should be aimed at balancing risk and return. More risks can be taken the farther you are from retirement, but as retirement approaches, a more risk-averse strategy is advisable. A combination of equities for growth, and bonds or cash for stability could work well.
If there are shortfalls in your retirement budget, cutting both small and large expenses could provide relief. A more extreme measure could be considering a reverse mortgage or relocating to a more tax or cost-friendly location.
Choosing a fiduciary, fee-only financial planner can provide advice tailored to your best interests, helping you steer clear of emotionally-driven decisions and aligning your strategy with your goals. Following a written financial plan makes it easier to change course when market conditions or your life circumstances change.
In conclusion, the creation of a $500,000 retirement fund requires anticipating your annual expenses and income during retirement, adhering to the 4% rule when withdrawing from your investment portfolio, considering part-time work or other sources of income, and finding effective ways to cut expenses.