Two 75-year-old retirees review their finances to ensure their savings can support them for the rest of their lives.
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To ensure that your retirement savings last the rest of your life, you often need to balance income and expenses over your expected lifespan. But let’s say you have $900,000 in an IRA. You can also consider whether you want to leave a financial legacy. And since all long-term forecasts are subject to change, you need to manage risk, possibly with the help of insurance policies and portfolio diversification.
Here’s how a 75-year-old with nearly $1 million in savings might approach income and expense planning for the rest of his life. Whether you’re a do-it-yourself retirement planner or need someone to guide you through every step of the process, a financial advisor can provide you with valuable insight.
Your savings will likely last the rest of your life if the amount of money you spend does not exceed the amount of income your portfolio generates. With that in mind, figuring out how to spread a certain amount of money over an indefinite period of time depends largely on making realistic projections of your expenses and income, while also taking into account circumstances that are difficult to foresee.
One important piece of information that is especially difficult to predict is how long a retiree is likely to live. The Social Security Administration’s life expectancy calculator indicates that a man who is now 75 is expected to live to be 87, while a woman of the same age could live to be almost 89. Of course, your individual life expectancy may vary depending on whether you smoke. , exercising, maintaining a healthy weight, or having an existing medical condition, among other factors.
The task of calculating whether your savings will last is further complicated by the possibility of unexpected events that can range from prolonged market booms or recessions to the need for expensive long-term care. However, if you use conservative projections and build in a buffer, you may be able to create a workable budget that will allow you to live comfortably for the rest of your life without depleting your savings. But if you need help creating a retirement income plan and/or budget, consider contacting a financial advisor.
A financial advisor meets with two clients in their seventies.
Starting with retirement income, you can use the 4% rule as a shortcut to estimate a safe withdrawal rate. This guideline suggests that withdrawing 4% of your portfolio in your first year of retirement and then adjusting your subsequent withdrawals for inflation each year can ensure your savings last 30 years.
But the 4% rule is not one-size-fits-all. It’s quite conservative, and the withdrawal of $36,000 from a $900,000 IRA may not be enough to meet the needs of a 75-year-old retiree. As a static approach, it also does not take into account how a retiree’s expenses and spending needs may change.
For a little more income and a lot more security, the retiree could put all $900,000 into 30-year U.S. Treasury bonds, currently paying 4.25%. That would earn $38,250 a year in interest until they turn 105, without ever touching the principal. On the other hand, bond yields may lag inflation, ultimately reducing purchasing power.
At the other end of the risk-reward spectrum, stocks promise higher returns, but with more risk. The S&P 500 Index, for example, has returned an average of almost 10% per year for decades. However, you probably can’t count on making $90,000 a year investing in the stock market because of market fluctuations, fees, and other influences that reduce actual returns over time. Investing entirely in stocks can also expose a retiree to excessive risk and volatility.
Other assets to consider for a retirement portfolio include annuities, dividend stocks, tax-exempt and corporate bonds, and alternative investments such as real estate. These offer different levels of risk and reward. Combining these to create a diversified portfolio can deliver more consistent and reliable returns over the long term.
Suppose the retiree built a diversified portfolio with an average annual return of 7%. If they were to withdraw 7% of their portfolio at age 75, that would give them $63,000 before taxes. Afterwards, they could adjust their withdrawals each year for inflation (between 2% and 3%). While their savings probably won’t last thirty years, given the higher withdrawal rate, they probably don’t need to, given their current age and life expectancy.
In addition, most retirees can expect to receive Social Security benefits. Depending on your earnings and when you file for benefits, you can collect up to $58,476 in 2024. However, that is the maximum amount. A February 2024 Social Security Administration report found that old-age and survivor insurance benefits to retired workers averaged $1,910 per month or $22,920 per year.
Adding the average Social Security benefit of $22,920 to the $63,000 in portfolio withdrawals yields a hypothetical retirement income of almost $86,000 at age 75. While this is a rough estimate based on a hypothetical scenario, a financial advisor can help you more accurately calculate what your retirement income could be based on your sources of income and Social Security earnings history.
Like retirement income, expenses can vary wildly. But averages can also be useful here. In 2023, the Employee Benefit Retirement Institute reported on a 2022 survey of retiree spending. This showed that the expenditure categories of retirees are divided as follows:
Expense category
Percentage
Housing
30%
Food
26%
Transport
11%
Entertainment
8%
Health insurance
8%
Other expenses
6%
Clothing
6%
Own medical costs
5%
Please note that this budget breakdown does not include expenses for taxes. Although many retirees pay less income tax than when they were working, taxes play an important role in retirement income planning.
Keep in mind that up to 85% of your Social Security benefits are taxable, depending on how much “combined income” you have. You calculate this amount by dividing your benefit by half and adding it to your benefit adjusted gross income (AGI) plus any tax-free interest income you may have. If your combined income as an individual is more than $25,000 ($32,000 if you’re married and filing jointly), you’ll pay taxes on up to 50% of your benefits. If it’s more than $34,000 ($44,000 if you’re married and filing jointly), up to 85% is taxable.
Meanwhile, withdrawals from your IRA are subject to income tax rates. Fortunately, some financial advisors can help you account for taxes in your retirement plan.
A 75-year-old retiree hugs her dog during an afternoon walk.
Any practical long-term forecast takes risks into account. You can manage portfolio risk by diversifying between different asset classes. Insurance offers another way to protect assets and protect them from unexpected expenses. Here are the main types of insurance to consider:
Some coverage may not be relevant or necessary. For example, a 75-year-old likely has Medicare and may not need private health insurance, although he may choose to pay for additional coverage. Likewise, if they rent out their home, they don’t need homeowner’s coverage and cheaper renters insurance may be sufficient. Whether you’re retired or in your prime earning years, a financial advisor can help you integrate insurance and other risk mitigation strategies into a comprehensive financial plan.
In theory, it is entirely possible for a 75-year-old to set aside €900,000 in savings for the rest of his life. Whether it will be enough for you depends on a number of factors, including your pension expenses and your risk appetite as an investor. You may be able to reduce costs by moving to a cheaper location, or increase your investment returns by carefully diversifying your portfolio. You may also consider protecting your assets and income from losses with appropriate insurance and risk management strategies.
Ask a financial advisor for insight into how you can make your retirement savings sustainable. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your 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.
SmartAsset’s retirement calculator can not only help you estimate how much money you’ll need to support your expected expenses in retirement, but can also project whether you’re on track to reach that savings goal.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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