Can you live on 50K a year?

For many people, $50,000 is enough income to live comfortably, although your location and lifestyle are important factors. In coastal cities, that money doesn't go as far, but there are certainly households in New York City that live on one or two Social Security incomes amounting to less than $50,000.

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By Justin Pritchard, CFP®

The annual income for a typical U.S. household over age 65 is just under $50,000. So, how are they doing financially? Let’s break down the numbers. There are several ways to figure out how much you need for retirement. One of them is focusing on an income level, such as a goal to retire on $50,000 per year. Or, you can strive to save a specific amount as a nest egg, and $1 million or so is a popular goal. Choosing an income level is an excellent idea. That’s because it’s a concrete way to understand your resources and needs. For example, you can plan ahead and evaluate your budget when you know that you’ll have $50,000 of annual income. Of course, it’s best to adjust that number for inflation, but that’s easy to do, and the calculator on this page (scroll down to use it) can help you run the numbers.

Can You Retire on $50k per Year?

For many people, $50,000 is enough income to live comfortably, although your location and lifestyle are important factors. In coastal cities, that money doesn’t go as far, but there are certainly households in New York City that live on one or two Social Security incomes amounting to less than $50,000. In less expensive areas, it’s significantly easier. The median annual income for U.S. households over age 65 is $47,357, based on the latest data from the U.S. Census Bureau. That means roughly half of all households in that group live on even less, and the income for a single person is $27,398.

In other words, it can be done.

Examples

That doesn’t mean it’s easy, and more money can provide more flexibility and comfort, but it doesn’t necessarily buy happiness. For example, looking at retirement in Colorado, an average monthly cost is roughly $4,644 (or $55,728) for a couple living in a relatively expensive metropolitan area. The cost is lower for those living in rural areas and for single people in retirement. Websites often publish lists of cities you can live in for less than $50,000 per year, although other factors are certainly important when you choose where to live. And anecdotally, I have clients who live comfortably on $50,000 or less—even in metro areas.

Continue reading below, or get the same information from this video:

How Much Do You Need for $50k of Income?

Retirement income is typically a combination of withdrawals from savings plus fixed income from Social Security or pensions. Your income sources provide a base of income, and withdrawals fill the gap if you need additional funds. The average Social Security retirement income is roughly $18,000 per year for an individual. But your Social Security benefit depends on factors like how much you’ve earned throughout life, how old you are when you claim benefits, and more. You might get substantially more (or less) than that, depending on your history.

Some Assumptions

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Assuming you earn $50,000 and you’re 61 years old now, Social Security’s quick calculator says that you might expect roughly $19,260 per year at your Full Retirement Age of 67. But if you currently earn $85,000 per year, that income could be more like $27,756. Again, it depends on your work history. We can calculate the amount you need to reach $50,000 of income by adjusting for your Social Security benefit:

If you get $19,260, you need $30,740.

If you get $27,756, you need $22,244.

Those numbers assume a single person. But if we assume two people in the household receive benefits (from Social Security ,a pension, or anywhere else) of $35,000 per year, that leaves only $15,000 per year that you need to draw from savings.

Quick Calculations

So, how much money do you need to generate $50,000 of total income. The best way to find out is to run some detailed calculations. Those projections can include assumptions about how much you earn on your investments, inflation adjustments so you don’t lose purchasing power, longevity, and more. This calculator can give you a rough idea of what you need, and it’s wise to triple-check with other sources and rules of thumb. Assuming you get $821,644 of Social Security income, you might need $711,909 at retirement to bring your income up to $50,000.

Assuming you get $27,756 of income, you might need $594,540 at retirement.

It’s impossible to predict exactly how much you’ll need, even with robust calculations, so there’s no guarantee that you’ll be successful with the amounts above. That’s because things like healthcare surprises, taxes, market crashes, bad timing, and other unpredictable events can derail any retirement plan. However, by running some numbers, you can make educated guesses and improve your chances of success.

Rule of Thumb

The poorly-named “4% rule” can also help you estimate if you’re on track for retirement. This research looked at worst-case scenarios to estimate how much the average retiree can withdraw from their savings. The result was that you might start with a withdrawal of 4% of your assets, and you increase the amount each year with inflation. Ideally, the money should last for 30 years. Again, there’s no guarantee that the 4% rule will prevent you from running out of money. It’s important to understand the assumptions behind the rule, and this approach is often criticized. In practice, nobody actually withdraws a flat amount each year and increases it systematically. Some say that 4% is too high. They argue that when interest rates are low and stock markets are near highs, it might make more sense to go with a lower number (like 3% or 3.3%). In some cases, it’s fine to withdraw more than 4%, at least temporarily.

Other complications, such as taxes, are ignored.

Still, we can get some insight by studying withdrawal rates. So, back to our assumptions:

Assume you get $27,756 per year from Social Security.

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That leaves $22,244 of annual withdrawals to reach $50k of income.

Based on our calculator above, you start with $594,540 in assets.

22,244 divided by 594,540 is 3.7%, which might be a reasonable withdrawal rate because it’s below 4%.

Is $50k per Year Enough—Realistically?

We’ve shown how people can and do retire with an income of $50,000 per year. But is that a good idea?

For many, it’s the only option, and it’s going fine. But that doesn’t mean that things always work out. Life can surprise us, and healthcare expenses are just one example of costs you face in retirement.

Healthcare

Routine medical care is surprisingly affordable, particularly after you reach age 65 and use Medicare. Yes, we’ve heard the numbers, such as the need to spend several hundred thousand dollars on healthcare during retirement years. But when you spread that out over a 25-year (or longer) retirement, it doesn’t look as bad. Especially if you have good health, you might be pleasantly surprised. If you need long-term care (LTC), the costs can jump significantly. That’s one of the bigger challenges for retirement planning, and there’s no single answer on how to deal with it. You can buy insurance, set funds aside, hope for the best, consider home equity as a safety net, or employ other strategies—but only time will tell what the best option is.

Taxes

There’s also the question of taxes. We’ve ignored taxes in the examples above. The good news is that if you target an income of $50,000, your tax burden might be relatively small. After factoring in a standard deduction (or itemized deductions, if you itemize), you may be in one of the lower tax brackets. As a bonus, keeping your taxable income low helps to minimize Medicare premiums, and you might be able to avoid taxation on Social Security benefits. Still, it’s important to understand what taxes you might pay in retirement so that you can plan for the after-tax spending you need. The video below may help you start the conversation with your CPA.

Inflation

It’s also critical to plan for inflation. Prices have historically risen over time, and you want your money to maintain purchasing power if that continues. As a result, it’s wise to plan for an income stream that increases with inflation. When that happens, your $50,000 increases by a small amount each year so that you can (hopefully) keep the same standard of living throughout retirement. If you found this information helpful, you’ll enjoy this series of educational emails and downloads on retirement planning. It’s available at no cost, and you can opt out at any time.

approachfp.com - Retire on $50k per Year: Examples and Calculator - Approach Financial

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