Financial personality Vincent Chan recently laid out how to retire with a $500,000 portfolio. It may sound counterintuitive to walk away from work with less than $1 million saved up, but it becomes more feasible when considering withdrawal rates, asset growth rates, and other income sources.
“The less money you spend, the earlier you can retire,” Chan said in a video on his YouTube channel.
Chan assumes that the $500,000 is invested in an index fund that produces an annualized 9% return. He also assumes that the portfolio is invested in bonds and stocks for a mix of growth and safety.
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Chan then ran calculations in his video that show the portfolio growing each year, even with a 4.7% withdrawal rate. Chan prefers a 4.7% withdrawal rate instead of a 4% withdrawal rate, which lets people retire sooner. However, he also assumes that you will keep your expenses low after retiring.
“If you are okay with living a more modest lifestyle, you don’t need as much,” he said in his video.
Chan also calculated inflation when running the numbers. He projected an annualized 3% inflation rate, which increases the amount you have to withdraw to maintain your lifestyle.
The portfolio can still grow if the 9% annualized return remains consistent, but Chan warns that you shouldn’t panic sell during corrections. He also said that people tend to spend less when they are retired, so you may not need to maintain a 4.7% withdrawal rate as you get older.
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Tax efficient withdrawals reduce your tax bill as you capitalize on your retirement plans, and Chan suggests starting with traditional accounts, up to the standard deduction. You don’t pay any taxes on withdrawals that are below the standard deduction, which is convenient for a $500,000 portfolio.
A 4.7% withdrawal rate comes to $23,500, and someone can withdraw from their traditional retirement accounts tax-free if they keep it to $23,500. That’s because the standard deduction for married couples is $31,500 for the current tax year.
“You want to avoid withdrawing from your Roth IRA first because you can take the money out here tax-free at any point,” Chan said in the video. “If you keep the money invested there, it will continue to grow tax-free.”
