If you have $600,000 saved toward retirement can you retire? It may be possible. It really all depends on what is important to you in retirement and how much income you need for a comfortable retirement.
To figure out if $600,000, or any amount, is enough for you to retire on you’ll need to consider things like your withdrawal strategy, investments, taxes, and other sources of income.
In this post I’ll guide you through an overview of each of those areas and help you figure out if you can retire on $600,000.
Some of the individual areas may require more technical detail. In those cases I link to other articles that explain further so I can keep this article on topic so it is easy for you to follow.
Remember that income planning is only part of retirement. You can get a quick pre-retirement planning checklist here to help you make sure you are covering all your bases.
How Much Can I Withdraw from $600,000?
You’ll need to spend some time considering your withdrawal strategy. Most strategies think of the withdrawal as a percentage of the portfolio called a withdrawal rate. My two favorite are:
- The 4% Rule: You withdraw 4% of your starting balance at retirement and adjust for inflation every year after that. However, the actual percentage may be different for you based on number of factors. I do not encourage you to blindly follow the 4% rule, but to think of it more as a method of determining an appropriate withdrawal rate.
- Variable Withdrawals: This is similar to the 4% rule, but you may adjust your withdrawal rate depending on how your investments do. If you investments perform exceptionally well you might increase your withdrawal by more than inflation. If you they perform poorly, you would reduce them. Using a variable withdrawal strategy allows you to start with a higher initial withdrawal, such as 5%.
Some withdrawal plans involve spending only the dividends or simply withdrawing the same fixed percentage of your portfolio each year. I don’t suggest these types of strategies because I believe they ignore some key risks.
How Are You Invested?
Your investment plan needs to support your withdrawal strategy. The most important element of your investment strategy you need to think about is your asset allocation, or mix of investments such as stocks and bonds.
While it is common to reduce your stocks in favor of bonds as you get close to retirement, you want to be careful not to reduce your stocks too much.
Realize that investing for retirement income when you retire is different than saving for retirement. If you don’t have enough stocks in your portfolio you may not be able to support a high enough withdrawal rate, especially when interest rates are so low.
For most retirees, somewhere between a 50/50 to a 70/30 portfolio will work. Just make sure that you consider your own appetite for investment fluctuations. Don’t be more aggressive with your investments than you are comfortable with. If you do, you will at the very least stress yourself out during a phase of life that should be relaxing and enjoyable. You will probably end up making a nervous decision when markets get rough that hurts your financial ability to retire the way you want to.
How Will My Withdrawals Be Taxed?
The amount that matters most isn’t how much you withdraw from your retirement savings, but the amount you get to keep after taxes. That’s the amount that lets you buy food, utilities, and gas.
Unless you have a Roth account such as a Roth 401k or Roth IRA, your withdrawals will be taxed at your ordinary income tax rates. Of course, money in Roth accounts can be withdrawn tax-free.
Make sure you account for the appropriate tax treatment. Take for instance the $600,000 and assume you withdraw 4%. You would withdraw $24,000 from your account.
If you have a tax-deferred retirement account, you’ll pay income tax on that $24,000. If you are married and file jointly with your spouse you’ll be in the 10% tax bracket for most of that not counting any deductions. For simplicity sake assume you’ll owe 10% on that full amount. That’s $2,400. Be sure to subtract your actual estimated tax from your withdrawal.
You may also have money outside of retirement accounts in taxable brokerage accounts. This money is always taxable and is taxed according to the income and capital gains on the investments in the account. You will want to be especially tax-conscious with this money and reduce taxable transactions on these accounts as much as possible.
Other Sources of Retirement Income
Don’t forget to include other sources of income such as Social Security, rental properties, pensions, or annuities.
These other sources of income are good because they help diversify your income streams which can be just as important as diversifying your investments.
Don’t forget that these payments may be taxed too. You’ll need to combine half of your Social Security benefit with your other income to figure out how much of it is taxable. I explain how to do that here: Are Social Security Benefits Taxed?
Add the expected amounts from these sources with your planned withdrawals from your portfolio and that will give you an idea if $600,000 is enough to retire on.
So is $600,000 Enough to Retire?
Use the outline above to figure out if you have enough to retire given your specific situation. This simple retirement calculator may help you as well.
As an example suppose that $600,000 is all in Roth accounts and you withdraw 5% using a variable withdrawal strategy. Further assume you’ll receive a $2,000 monthly benefit from Social Security. That would put you below the income level that would trigger taxes on your Social Security benefit.
You would withdraw $30,000 from your savings and have a $24,000 annual benefit from Social Security for a combined income of $54,000. If you can live comfortably on that, you are ready to retire.
Again, this is just an example. Consider how you will withdraw from your account, how much you need to retire comfortably, and other sources of income. If you think you’d rather work with a retirement advisor to help you figure this out, here’s a guide with questions to ask a financial advisor about retirement.