Retire with $400k: a complete guide
This article covers how long your money will likely last in several different retirement scenarios and how much tax you may need to account for each year.
While retiring on $400,000 is possible and above the average retirement savings, you may need to adjust your lifestyle expectations if this is your final retirement amount.
If you want to retire early, $400,000 might be a difficult number to make stretch.
If you want to grow your savings before retirement, there are a number of expert-recommended way to boost bank balance.
If you want to get ready for retirement, a trusted financial advisor can help you manage your finances and ensure your retirement savings align with your goals.
Can I retire on $400k?
It is 100% possible to retire with $400,000, provided you’re not looking to enjoy a particularly expensive retirement lifestyle or hoping to leave the workforce notably early.
Here’s an example scenario:
You plan to retire at 60, just one year earlier than the average age, according to Gallup data. You’ve placed your life expectancy at 85, so you need an income to carry you through 25 years. You’re anticipating your annual expenses won’t be more than $15,600 a year or $1,300 a month, totaling $390,000.
If you play with the parameters of that scenario, however, you’ll soon see how things can rapidly shift:
|Scenario adjustment||Changes triggered by the scenario adjustment||The final retirement savings figure required|
|You plan to retire at 55 rather than 60||You need income for 30 years rather than 25||$468,000|
|You think your annual expenses will be nearer to $20,000 than $15,600||You need an extra $4,400 of income each year across 25 years total||$500,000|
|Your monthly expenses will total $1,800 rather than $1,300||You need an extra $500 of income each month across 25 years total||$540,000|
How long will $400k last in retirement?
The length of time that $400k can last you once you retire depends on how much you’ll spend each month as a retiree, your retirement lifestyle, and how much time you want your retirement income to cover.
To actively answer the question of “How long will my money last in retirement?” you need to understand your spending habits, including how they’re likely to change and how they aren’t expected to by the time you reach retirement age. Be as honest as possible with yourself, as you’ll only do your future self a disservice if you aren’t.
Ask questions like the following, building a clear and sensible picture of your needs:
How many essential outgoings will I have each month as a retiree?
How much non-essential spending am I likely to do as a retiree?
Will I receive any other sources of income, like Social Security, that I can factor in?
Will I have any other financial obligations that I need to factor in?
Would I be willing to work part-time to supplement my retirement income?
How much income tax will I pay if I have $400k in retirement?
It’s difficult to be precise about the amount of tax you’ll pay on your retirement income since so much depends on the specifics of your situation. The best way to break it down is as follows:
Look at what form your retirement income takes – some retirement savings accounts tax you when you deposit your money, such as a Roth IRA. Others tax you when you withdraw the money as a retiree, such as a traditional IRA or 401(k). Check whether your savings will be taxed or untaxed at the distribution point; this will strongly affect your ultimate tax burden.
Look at any other forms of income you may not have considered – figure out your entitlement for Social Security and any other similar benefits and how these things will be taxed. Speak with a financial advisor about how your investments will be taxed and whether they’ll be considered capital gains. Look at the whole picture of your finances as a retiree, leaving no stone unturned.
Calculate your total annual income and, accordingly, your tax liability – based on federal and state requirements, figure out how much you will earn, on average, each retired year. Then, determine from that how much you’ll pay in tax. You’ll only be able to do this according to current rates, so while it won’t be 100 percent accurate, it will undoubtedly be a helpful barometer for your reference.
Is $400k above the average retirement saving in the US?
Looking at every working-age American, $400k is above the average as retirement savings amounts go. The Economic Policy Institute (EPI) puts that figure at just under $100,000. But what happens when you narrow it down to Americans who actively have retirement savings and track them, then sort by age group?
$400k becomes either right on or just below the average. For example, according to the Federal Reserve, the average retirement savings balance among 55 to 64-year-olds is $408,420, rising to $426,070 among 65 to 74-year-olds.
But how much is enough to retire? How much is enough to retire happily and comfortably? Will $400k work for you in your circumstances?
Can you retire at 50 with $400k?
If you choose to retire at 50 and plan to spread $400,000 across 35 years up to a life expectancy of 85, you’ll receive, at minimum, $11,429 annually or $952 monthly. If you can live frugally and make that monthly budget work, you can leave the workforce ten years earlier than average and relax in the peace of your golden years.
If this doesn’t seem like enough to cover your needs and expenses, you still have a few options (short of working until traditional retirement age):
Retire at 55, splitting the difference and giving yourself around $1,111 monthly.
Semi-retire at 50, but keep working part-time, supplementing your income from savings.
Build up your $400k to a higher total between now and your 50th birthday.
Can you retire at 65 with $400k?
If you decide to wait a little bit longer to retire, your $400,000 will stretch further and provide you with more income annually.
Not factoring in additional income from other sources or taking taxes into account, if you retire at 65 and plan to spread $400,000 across 15 years up to a life expectancy of 85, you’ll receive, at minimum, $26,666 annually or just over $2,200 monthly.
While expenses do reduce slightly when you retire – your daily commutes grind to a halt which means less money is spent on gas or metro tickets – you may end up spending more money in other areas, such as healthcare.
It’s important to factor in all of these considerations when deciding when and how much to retire on.
Three ways to increase your retirement savings
If you want to grow your retirement savings in your remaining working years, here are three tried and tested, expert-recommended methods you might like to try out:
Focus on financial literacy – though you may have some understanding of investing, budgeting and saving, a trusted financial advisor can genuinely transform your level of financial literacy.
Complete a lifestyle overhaul – it’s easy to set up your life with the present at the forefront of your mind and the distant future barely a consideration. If this is you, you might need to re-assess your lifestyle and take a more whole-life approach.
Save in all the right places – this method has a double meaning. On the one hand, keep all the money you can by cutting non-essential spending. Simultaneously, save your $400k+ for retirement in a suitable account like a traditional or Roth IRA.
The bottom line
It isn’t easy to save a considerable figure like $400,000, especially if you’re a working person on an average salary in a climate of increasing costs. You may be happy with this final figure or still want to grow and consolidate wealth ahead of your golden years.
For financial planning advice free of bias and filled with expertise, why not connect with a qualified SEC-regulated advisor? They can deep dive into your finances and develop a retirement plan perfectly suited to your needs. Match with a financial advisor today.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.