SmartAsset and Yahoo Finance LLC may earn commissions or income through links in the content below.
To truly create a comprehensive retirement budget as a couple, you’ll need to consider both potential income sources and realistic expenses. While it is possible to derive an estimated income or income range from these figures, the expense side of the budget is equally important and potentially much more variable. Other variables include your planned retirement date, whether you have other sources of retirement income, and how you want to plan to handle difficult-to-forecast expenses, such as health care and long-term care costs.
To get a complete picture of your expenses and income in retirement, consider speaking with a financial advisor.
Since 65 is within the normal retirement age range, you may plan to retire immediately. If so, you will need to generate your investment-based income from the $1.9 million you currently have in retirement accounts. If you were willing and able to wait a few years, this amount could grow a little and allow you to increase your retirement income.
More specifically, if you wait until full retirement age at age 67, your Social Security benefit will also increase. However, right now, savings of this size and the Social Security benefit described could generate a solid retirement income.
The 4% rule is a historical rule that you can use to start thinking about how much you can safely withdraw from your retirement investments each year. It employs a conservative strategy in some markets, or too aggressive in others, so following this rule carries risks on both sides. However, the same can be said for any path you choose.
Applying this rule suggests you could withdraw 4% of your $1.9 million the first year and a similar amount, adjusted for inflation, each year thereafter for 25 years, although that doesn’t represent any potential gain. In this limited example, that means you would withdraw $76,000 the first year. So, if inflation is 3% next year, your withdrawal would increase by that same amount to $78,280.
Annually, their combined Social Security benefits amount to $62,400, or $5,200 per month. Combined with $76,000 in investments, your total income would equal $138,400 in the first year. Depending on the lifestyle you want to maintain as a retiree, this should give you quite a bit of flexibility as a couple.
For many retirees, $138,400 annually is an adequate income for a comfortable lifestyle. In the absence of details about spending habits, another general rule can be applied. Multiplying pre-retirement income by a percentage is one way to determine a potential need for post-retirement income. This percentage can range from 70% to 90% or more, depending on the retiree.
In this case, let’s assume that 80% would be accurate for you and your spouse. If so, $138,400 would be enough to maintain your pre-retirement lifestyle if you earned approximately $172,000 combined per year before you retire. If you’re used to living on more than that, you may have to cut back on your retirement.
Talk to a financial advisor today about retirement planning.
Since you don’t have a Roth IRA, you’ll have to pay income taxes when you retire. Under the 2024 tax rules (which will no doubt change in future years), you could use the $32,200 standard deduction available to married couples when both spouses are 65 or older. This would reduce your taxable income to $106,200.
Since your taxable income is more than $34,000, you will have to pay taxes on 85% of your Social Security income. This means that only 15%, or $9,360, of your Social Security income will not be subject to taxes. So now your taxable income is $96,840 after all deductions.
Using the 2024 tax brackets, $96,840 of taxable income puts you, at the highest level, in the 22% bracket. At that income level, your tax bill will be about $11,715 the first year.
When you turn age 73, you will begin receiving required minimum distributions (RMDs) from your retirement accounts. Using the IRS table to calculate these distributions, your first year RMD will be $71,698.
RMD income is taxable, so this income could have tax implications. However, the RMD amount of $71,698 is less than the amount you will withdraw in the first year of retirement. Therefore, RMDs are unlikely to have much effect on your tax bill as a retiree unless circumstances exist one way or another.
Your retirement plan may also want to consider long-term care. A 2021 Genworth Financial Cost of Care Survey found that annual costs for a semi-private room in a skilled nursing facility could reach $94,000 per year, and are likely to continue rising each year. This is more than two-thirds of your entire expected income for the first year, so a prolonged stay in one of these could be a major financial concern.
To protect yourself from these potential costs, you might consider long-term care insurance. Keep in mind that premiums are not cheap, especially if you start later in life. Prices increase considerably as you age and can be difficult to get if you are over 70 or in poor health.
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 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.
You can use SmartAsset’s retirement calculator to generate what-if scenarios that can help you decide if it’s safe to retire.
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.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with potential clients and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.
The post We are 65 years old with $1.9 million in a 401(k) and an IRA, and $5,200 a month in Social Security. What is our retirement budget? appeared first on SmartReads by SmartAsset.
