Why You Can Retire on Less Than $500,000


fiskes / iStock.com

fiskes / iStock.com

Building a nest egg is hard work. Even with a modest goal of saving $500,000, it can be hard to imagine saving that amount, especially for many Americans who make less than a tenth of that amount a year. not.

Read more: Lost $400k in retirement savings to Roth 401(k) — you could be too if you’re not careful
See also: 3 Ways to Prevent a Retirement Recession

But the good news is that smart savings and compound interest can get you closer to your goals than you think. In fact, according to LJPR CEO Leon Labrek, simple things like saving as much as you can in your paycheck each pay period and making the most of your 401(k) plan can save about 50% of your retirement money. It’s an important first step toward saving $10,000 or more. is a commission-only financial advisor and wealth manager based in Troy, Michigan.

Here’s how:

Syda Productions / Shutterstock.com

Syda Productions / Shutterstock.com

The best way to save for retirement

Having helped some clients save well over $500,000 for the future, Labrek believes he has found a solid formula for accumulating wealth. It’s simply a matter of saving a larger percentage of your income.

Labrek recalls a client approaching him in the early 1980s and saying, “I want you to do something simple.” Mr. Labrek replied, “Put 18.7 percent of the money into the Vanguard Windsor Foundation.” The client is that in 20 years he has amassed a huge fortune of $2.5 million.

A client who had piled up all his Vanguard statements unopened was pleasantly surprised. “Since then, I have adopted the 18.7 percent solution,” said Labrek, noting that the figure also includes employer contributions. “So if your employer matches his 5%, your job is to save him only 13.7%.”

Saving for retirement: Experts say this magic number is the key, it’s not $1 million
Find out: 6 things Social Security deducts from your benefits

Jesus Trilo Lago/Getty Images/iStockphoto

Jesus Trilo Lago/Getty Images/iStockphoto

Let compound interest do the heavy lifting

The previous story shows something important. Much of the work of building a retirement fund is not actually done by you. If you want to hit close to $500,000, you should expect a steady return from diversified investments in stocks and bonds.

Earning the latest national median household income of $67,521 a year and investing 18.7% of your salary at an annual rate of 8% compounded, you’ll reach your goal of $500,000 in less than 19 years. If he waits until his 26th year of retirement, that sum will swell to $1.2 million.

So all the critical first steps are your responsibility, but fortunately most of the work after that is mostly done manually.

Savings for retirement: Here’s how much cash baby boomers need to retire in the next five years

Page Light Studio / Shutterstock.com

Page Light Studio / Shutterstock.com

Why You Probably Need Nearly $500,000 For Retirement

You may ask yourself, “Do I really need nearly $500,000 in retirement savings?” The answer depends on your lifestyle and whether you want to maintain it after you retire. $750,000 or even $1 million more in retirement savings may not be enough if you plan to live well into your golden years.

If you start early, know how much to save, and know how to withdraw in a disciplined manner, usually at a rate determined in consultation with your financial advisor, you will reach your retirement goals. It is possible.

Grady Lease / iStock.com

Grady Lease / iStock.com

Cost of living matters

Of course, you can’t answer the question “How much do you need to retire?” Until you carefully consider your expected expenses. This means that if you want to live in a place where the cost of living is high, you will have to save even more.

For example, a GOBankingRates study found that a $500,000 nest egg lasts less than six years in expensive Hawaii, but more than 12 years in Mississippi.

“If you live in a big city center [and] The middle class earns at least $75,000 per spouse, so they’ll probably need more than $1 million,” said a certified financial planner at Clarity Capital in Newport Beach, Calif. Partners Managing Partner Todd Lastman said.

Living outside an expensive city may require less, but reaching at least $500,000 gives you more flexibility in how you spend your retirement.

The good news is that if you decide you need to raise well over $500,000, the methods of getting there are pretty much the same. Here are his five easy steps to reach your retirement goals.

Sue Hwang/GOBankingRates

Sue Hwang/GOBankingRates

1. Check for 401(k) matches

Go to your benefits officer and find out how much your employer applies to your 401(k) and other retirement savings plans, says Lastman. Then put as much money into your 401(k) plan as possible to get the biggest match.

Labrecque also agreed that it would be foolish to skip the game. “Free money is free money,” he said. “And the matches are free and cost money.”

See also: 6 retirement incomes that aren’t taxable

Fizkes / Shutterstock.com

Fizkes / Shutterstock.com

2. Save half of your raise

Labrek said he would increase his 401(k) contributions by 1% for a 2% pay raise. Keep doing this every time you get a raise. “Don’t just put more money into the plan, increase the contribution rate,” he said.

Dean Drobot / Shutterstock.com

Dean Drobot / Shutterstock.com

3. Don’t panic if the market crashes

In some cases, the stock market is sluggish, causing some investors to panic and sell their shares quickly. But letting go of stocks is often a big mistake.

“Don’t quit, don’t quit,” Labrek said. “I’ve seen people quit their 401k in a down market. It’s a terrible idea. Down markets are sales. We buy steaks on sale, we buy clothing on sale. Invest in sale.”

In other words, a bear market can be an opportunity to buy at a discounted price. Also, remember that saving for retirement is a long-term process. Eventually the stock market will recover, and so will your investment.

Pekik / iStock.com

Pekik / iStock.com

4. Invest your tax refunds

Next year, don’t splurge on flat-screen TVs, new shoes, or last-minute vacations with your tax refund. Instead, invest your tax refunds in reaching your retirement goals.

“I see people getting $2,600 reimbursed while claiming they can’t save for retirement,” Labrek said.

Not only is direct deposit the “best and fastest way” to get your tax refund, according to the IRS website, but it also helps curb the urge to spend your tax refund on something you don’t need. You also have the option of splitting the refund over 2 or 3 additional financial accounts containing your IRA.

Tip: 10 great ways to reduce taxes in retirement

Jasmina 007/Getty Images

Jasmina 007/Getty Images

5. Invest in yourself

According to Lastman, taking classes, getting an MBA, and anything else you can do to improve your professional value can pay off in the long run. More income means more investment. You may not even need to pay for classes out of your own pocket, as many employers will pay for them.

Learn more about GOBankingRates

Joel Anderson contributed reporting for this article.

This article originally appeared on GOBankingRates.com: Why You Can Retire With Less Than $500,000

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