For most people, $500,000 is a lot of money. It's more than many Americans' homes and well over what most workers make in a year. But when it comes to retirement savings, while still a large sum, $500,000 doesn't go as far as many would hope.
While it may be possible to retire on $500,000, depending on what other sources of retirement income you have, it's important to understand what that future looks like before you get there.
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What does retiring on $500,000 look like?
One common retirement rule of thumb is to withdraw 4% of your savings in the first year of retirement and adjust this amount annually for inflation. If we apply this to a $500,000 nest egg, you get $20,000 to live on in your first year of retirement.
Many Americans would find it difficult to live off that amount today, and in the future, $20,000 won't go as far as it does today. Fortunately, most people don't have to cover their retirement expenses on their own.
If you get $2,000 per month from Social Security -- $24,000 per year -- that bumps you up to $48,000 in annual retirement income. This could be enough if you live frugally in an area with a lower cost of living.
You may be able to increase your monthly retirement income even further if you have a pension or you plan to work at least part-time in retirement. The more retirement income sources you have, the greater your odds of retiring comfortably.
Set your own retirement goal based on your lifestyle
While saving $500,000 for retirement is a significant milestone worth celebrating, that doesn't mean it's the right retirement savings goal for you. Instead of selecting a round number, set a savings target that fits your lifestyle.
Think about how much you plan to spend annually in retirement. You can use your current expenses as a benchmark, but you may have to adjust your spending up or down in certain areas. Then, subtract from this total any money you expect to come from Social Security, a job, or a pension. Multiply the remaining amount by 25. Use this as your savings target.
For example, if you want to spend $75,000 annually in retirement and you expect you'll get $25,000 from Social Security each year, you'll need to cover the remaining $50,000 on your own. Multiplying this by 25 yields a savings target of $1.25 million.
If you're not able to meet your savings target, you might need to adjust your retirement plan. You could plan to spend less in retirement or delay your retirement date. Or you could look for ways to save more in the present.
Find a strategy that works with you and do your best to stick with it. Check in with yourself at least once a year to see if you can identify new opportunities to increase your savings.
