Why $500,000 Is A Key Figure In Retirement Planning

Fear mongering surrounds the topic of retirement. To hear many “experts” tell it, a solid, happy retirement is almost, if not completely, out of reach.

Suze Orman recently said that everyone (everyone) should work until they’re at least 70 years old. Legg Mason released a study stating that if you don’t have at least $2.5 million socked away, you shouldn’t retire. Fidelity Investments reported that a 65-year-old couple retiring today will spend an average total of $275,000 out of pocket on health care. If these declarations don’t strike fear into the heart of every would-be retiree, I don’t know what would.

But be careful not to buy these fear headlines hook, line and sinker. I know from experience that there is a different way to secure a happy retirement, perhaps at 65 and perhaps earlier, with less.

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‘Tis the season when most Americans are simply trying not to break the bank at Christmas. What we need now is accessible retirement advice that can help the majority of us. Let’s talk about a more realistic benchmark.

According to my research, with just a half-a-million-dollar nest egg, you can live a happy and financially secure retirement. While everyone’s financial retirement income needs vary, this number can work for retirees who carry little debt and who don’t live an extravagant lifestyle. So, instead of setting our sights sky-high for numbers like $2 million or $3 million, we should all first aim for a healthy $500,000 in savings.

How did I reach this number? It is the product of both my professional experience and research. Over time, I have made an interesting finding: Once a certain amount of wealth is attained, people experience a diminishing return of happiness. I have termed this phenomenon “The Plateau Effect,” and it is a key factor in determining how much money we need to be happy during retirement.

My research on the happiest retirees lends some real numbers to the plateau effect. In terms of net worth (including stocks, bonds, mutual funds, and cash), those retirees with around $100,000 reported feeling unhappy or just slightly happy.

And here’s where it gets really interesting. The $500,000 mark was the inflection point where folks moved from slightly happy to moderately happy, all the way up to extremely happy. Net worth beyond $500,000 was not found to have much additional impact on happiness.

Sure, $500,000 sounds like a lot of money to most people. And it is. But it is a much more attainable goal than $2 million, and no matter your income level, you have a better chance of reaching it.

How? With $100 per month.

Let’s say that you have 40 years to invest and build for your retirement. If you simply take $100 each month and invest it, assuming a 10 percent return and that your investment compounds monthly, you’ll have a sweet $637,000 at the end of those four decades. With just annual compounding, you’ll reach $584,000.

A 10 percent annual rate of return, you say? You may be surprised by the following. Despite two wicked market corrections over the past 20 years, the S&P has still averaged over 8 percent per year including dividends during this time. REITs, a common option in most 401(k) plans, have averaged 11 percent over the past 20 years. And over even longer periods of time, i.e., the past 40 years, the S&P 500 has averaged over 11 percent per year when dividends are included. I’m not saying these returns have been a given for most investors, nor is there a guarantee that this profitable run will continue forever. However, if you have a long time horizon, 20 or 40 years or more, then using a 10 percent assumption in this example is constructive.

The next part is even easier. Surely, you can wring $100 out of your monthly spending to invest for retirement.

Note this. Minding your life expenses and saving for retirement doesn’t mean denying yourself small pleasures like a fancy coffee or dinner out. The key here is that if you’re pound-wise, you can afford to be penny-foolish — you can spend your pennies on whatever you like, so long as you get the big things right. These big expenses in life are items like your mortgage, car expense, consumer debt … and now you can include that $100 per month for your retirement.

So, there you have it. The secret to a happy retirement isn’t having $2 million in the bank. Nor is it about how much you currently earn. It’s about having a simple plan, getting started, and being committed.

The original AJC article appears here.


This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.