I'm 60 and just received a $400,000 windfall — but it's the only money I’ve got for retirement. Can I make this work?

Let’s pretend, for example, that Xavier is 60 and recently received a $400,000 windfall from a lawsuit settlement for wrongful termination. Xavier isn’t working and has only this money to rely on. Unfortunately, he’s not sure how he can make it last for the rest of his life or if it’s even possible to do that.

So, does Xavier have enough, or should he explore other options to try to shore up his retirement?

Is $400,000 enough to live on?

Xavier needs to understand what income his $400,000 could actually provide when he decides whether living on his windfall is possible.

“At the core of retirement planning is the simple equation of income minus expenses,” Brando Reyna, founder and managing principal of Reyna Capital Advisors, told Moneywise. “If that number is positive, you’re on track. If that number is negative, you have some work ahead of you.”

While Reyna explained that $400,000 could generate around $30,000 in annual returns, assuming a 7% average annual ROI, many seniors invest more conservatively and don’t consistently generate that much income from investments. That’s one reason the common recommendation is to withdraw just 4% in year one, then adjust up for inflation.

At a 4% withdrawal rate, Xavier would be looking at just $16,000 in annual income. And while Xavier could invest more aggressively, including in alternative assets that may generate higher returns, Reyna warns that this strategy carries some big risks.

“Returns will not be steady. Plus, behavioral finance repeatedly shows the increased volatility that comes with seeking higher returns leads us to make emotional decisions that are detrimental to performance,” Reyna said. “Over my more than 20-year career, I’ve seen countless investors who couldn’t handle seeing their accounts drop and sold at the wrong time.”

Setting a budget is a good starting point

Since Xavier would have very little income if he relied on his $400,000 alone, he’ll need to consider what his spending would look like.

“I would start with a budget,” Domenick D’Andrea, a financial advisor and co-founder of DanDarah Wealth Management, told Moneywise. “What are your day-to-day fixed expenses that you need to pay just to survive?”

D’Andrea suggested that Xavier might be able to live on $20,000 to $24,000 from his $400,000 for a few years before claiming Social Security, but that this would create a huge risk if Xavier faced a market downturn while relying heavily on savings before Social Security kicks in.

“Let’s just say we have a 20% correction in the market. Now your $400,000 is worth around $320,000,” D’Andrea said. If you’re relying on savings and forced to make large withdrawals before the market recovers, D’Andrea warned that “you may never recover your $400,000, and the longer the downturn lasts, the more likely you are to run out of money.”

D’Andrea advised that Xavier should most likely try to get a job for a few years to avoid this undesirable outcome.