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Let’s say that, as a married couple, you have $1.4 million in your IRA accounts and, at age 66, expect about $4,100 a month in Social Security. Based on some typical rules of thumb, you might be able to plan for around $108,000 per year in retirement income, but how much you actually need and will be able to take will depend on your specific circumstances.
Here’s how to think about it, including a breakdown of the numbers. And if you want someone to verify your own retirement calculations, consider contacting a financial advisor for free.
Frequent commenter on this section Kevin Caldwell, principal at wealth management firm Golden Road Advisors, refers to retirement planning as a “bucket” approach. As you prepare for retirement, it’s good to think about your budget in terms of specific aspects of life. One way to organize this is:
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Needs
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Lifestyle
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Aspiration
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Estate
Your needs bucket is the money you, at a minimum, need to survive. What income must come in each month to keep the food warm and the bills paid?
Your lifestyle bucket is the money you realistically want to live the life you enjoy. This is not money for big, new things. Rather, it’s the money to continue going to your favorite restaurants and taking your usual trips.
Your aspiration bucket is the money that, ideally, allows you to extend or extend your lifestyle. This is the money for a new boat, that trip around the world or retiring at 60. It’s for those big changes.
Finally, your estate is money for anything you want to leave behind. Whether there are people who need it or just something you care about, this is how you plan.
Thinking about retirement this way can make budgeting clearer. An experienced fiduciary financial advisor can help you put together a plan that covers all the bases.
If your retirement income doesn’t cover needs, then you simply can’t afford to retire, not yet. You will lose the house. If you only meet the needs group, then you can technically afford to retire, but you should wait if possible.
If your retirement income fits your lifestyle, you should generally be fine. You can probably retire comfortably, as long as you have adequate risk management, including long-term care insurance. The same goes if your retirement income meets aspirations, in which case it’s good for you.
And the wild card is his assets. This depends on your individual circumstances. Some retirees have dependents or obligations, which is why they must leave a minimum asset. Others would simply like to leave something for their loved ones. This is situational.
Next, you need to match your budget to your income.
Your retirement income will come from your benefits, pensions and combined assets. For most households, this usually means retirement accounts and Social Security. In our example, let’s say you are a married couple with $1.4 million in your IRA accounts. You are 66 years old and can currently collect $4,100 in Social Security benefits.
Let’s start with Social Security. At age 66, you would collect 93.3% of your full benefits. If you wait until age 67, you can increase your annual Social Security income to $52,733 per year. Since this increase will last for the rest of your life, it’s probably worth waiting if you can. (If you wait until age 70 to collect Social Security, you can increase your lifetime benefits even more, to $65,388 per year.)
Then there are your IRA accounts. There are several ways to think about portfolio income. The standard option is the 4% rule. By this logic, a combination of safe investments and inflation-adjusted withdrawals is assumed to lead to 4% withdrawals over 25 years. Starting at $1.4 million, that would give you about $56,000 a year.
This gives us our number above. Combined, your full Social Security benefits and a 4% IRA withdrawal rate would amount to approximately $108,733 of inflation-adjusted income per year.
Talk to a financial advisor for free to plan your own retirement budget.
That said, there are many ways to think about portfolio income. For example, you could use this portfolio to purchase a lifetime annuity. That annuity could generate about $112,584 per year ($9,382 per month). This is significantly more upfront than a 4% plan, which will give you a combined income of $161,784, but on the other hand it won’t increase with inflation. Or you could invest for more aggressive returns, adding more stocks to your portfolio to get a growth rate closer to 8% than 4%. This could earn you a lot more income over time, but also at the cost of significantly higher volatility.
It all depends on your personal situation and risk capacity.
Finally, there are your retirement needs.
First, be sure to keep an eye on your RMDs. This is the minimum amount you should withdraw from your portfolio each year starting at age 73. For example, take that 4% burn rate. At age 73, you would have about $1.12 million left in your IRA accounts, resulting in an RMD of $42,264. Since your planned income is probably higher than this, the RMD rule probably won’t be an issue, but it’s important to remember.
Then there are taxes. You will pay full income taxes on all earnings withdrawn from an IRA just like ordinary income. Here, you will also pay income taxes on 85% of your Social Security benefits because your AGI will be relatively high.
A financial advisor can help you determine an effective tax strategy for your retirement accounts.
Finally, be sure to prepare for the specific needs that come with retirement. When you retire, several different structures change in your life. On the one hand, you can expect your income to decrease. Most households spend less in retirement, and not having to put money into retirement savings will free up a significant portion of your budget (between 5% and 10% for most households). On the other hand, you will have new expenses. Among other things, you’ll need gap insurance (to cover needs that Medicare doesn’t cover) and long-term care insurance (in case you or your spouse have residential needs in the future). When you do the math on your lifestyle needs and expenses, be sure to factor in costs like this.
Finally, don’t forget about inflation, especially if you rent your home or live in a high-cost urban area. Even with the Federal Reserve’s 2% benchmark, prices tend to double roughly every 30 years. Social Security relies on this, as do many income strategies, but it’s important to be aware.
For professional information about your own retirement plan, you can contact and speak with a financial advisor for free.
With a $1.4 million IRA and about $4,100 per month in Social Security at age 66, you could expect a retirement income of about $108,000 per year. However, what your actual retirement budget is depends entirely on your lifestyle and needs.
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To make a retirement budget, you need to start with your expenses and needs as much as your income. Many households start with their portfolio and hope to be able to work backwards from there. But as you plan for retirement, be sure to keep an eye on what you need that money for.
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A financial advisor can help you create a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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