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Suppose you, as a married couple, have $1.4 million in IRAs and expect to receive about $4,100 per month in Social Security benefits at age 66. Based on some typical rules of thumb, you might be able to expect a retirement income of around $108,000 per year, but how much you actually need and can withdraw 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 audit your own retirement calculations, consider consulting a financial advisor for free.
Kevin Caldwell, director of asset management firm Golden Road Advisors, who regularly comments on this section, calls retirement planning a “bucket” approach. As you prepare for retirement, it’s good to think about your budget in terms of specific parts 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 least need to survive. What is the income that needs to come through the door every month to keep the food warm and the bills paid?
Your lifestyle bucket is the money you realistically need to live the life you enjoy. This isn’t money for big, new things. Rather, it’s the money to keep going to your favorite restaurants and taking your regular outings.
Your ambition bucket is the money that will, ideally, allow you to grow or expand your lifestyle. This is the money for a new boat, that round-the-world trip, or retiring at age 60. It’s for those big swings.
Finally, your estate bucket is the money for everything you plan to leave behind. Whether there are people who need you, or just something you care about, this is how you plan for it.
Thinking about your retirement this way can help make your budgeting clearer. An experienced fiduciary financial advisor can help you create a plan that covers all the fundamentals.
If your retirement income doesn’t meet needs, you simply can’t afford to retire, not yet. You will lose the house. If it only meets needs, you can technically afford to retire, but if at all possible, you should wait.
If your retirement income meets your lifestyle, then overall you should be fine. You can probably retire comfortably, provided you have good risk management in place, including long-term care insurance. The same applies if your retirement income meets expectations, in which case it’s good for you.
And the joker is your estate bucket. This depends on your individual circumstances. Some retirees have dependents or obligations that require them to leave a minimal legacy. Others simply want to leave something behind for their loved ones. This is situational.
Next, you need to tailor your budget to your income.
Your retirement income comes from your combined benefits, pensions and assets. For most households, this generally means retirement accounts and Social Security. In our example here, let’s say you are a married couple with $1.4 million in IRAs. You are 66 and can currently receive $4,100 in Social Security benefits.
Let’s start with Social Security. At the age of 66 you will receive 93.3% of your full benefit. If you wait until age 67, you can increase your annual Social Security income to $52,733 per year. Because 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 further increase your lifetime benefits to $65,388 per year.)
Then there are your IRAs. There are different ways to think about portfolio income. The default option is the 4% rule. Based on this logic, you assume a combination of safe investments and inflation-adjusted withdrawals, leading to withdrawals of 4% over 25 years. Starting with $1.4 million, that would generate about $56,000 per year.
This gives us our number at the top. Combined, your full Social Security benefits and a 4% IRA withdrawal rate would amount to about $108,733 in inflation-adjusted income per year.
Talk to a financial advisor for free to determine your own retirement budget.
That said, there are many ways to think about portfolio income. With this portfolio you can, for example, buy a lifelong annuity. That annuity could earn approximately $112,584 per year ($9,382 per month). This is significantly more than a 4% plan initially, giving you a combined income of $161,784, but on the other hand it won’t increase with inflation. Or you can invest for more aggressive returns, putting more stocks in your portfolio for a growth rate closer to 8% than 4%. This can give you significantly more income over time, but it also comes at the cost of significantly more volatility.
It all depends on your personal situation and risk appetite.
Finally, there are your recording needs.
First, make sure you keep an eye on your RMDs. This is the minimum amount you must withdraw from your portfolio every year from age 73. Take that 4% burn rate for example. At age 73, you would have about $1.12 million left in your IRAs, which would yield an RMD of $42,264. Since your projected income is likely higher, the RMD rule probably won’t be an issue, but it’s important to remember.
Then there are taxes. You pay full income taxes on any income withdrawn from an IRA, just as you would with regular income. Here you will also pay income tax 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, make sure you prepare for the specific needs that retirement brings. When you retire, several structures in your life change. On the one hand, you can assume that your income will have to decrease. Most households spend less in retirement, and not having to put money toward retirement savings frees up a significant portion of your budget (between 5% and 10% for most households). On the other hand, you get new releases. 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 partner have housing needs in the future). When you calculate your needs and lifestyle expenses, make sure you take these types of costs into account.
Finally, don’t forget about inflation, especially if you rent your home or live in an expensive urban area. Even at the Federal Reserve’s 2% benchmark, prices tend to double about every thirty years. Social security is designed for this, and many income strategies are too, but it is important to keep an eye on this.
For professional insights for your own pension plan, you can consult and speak to 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, your actual retirement budget depends entirely on your lifestyle and needs.
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Creating a retirement budget should start with your expenses and needs, as well as your income. Many households start with their portfolio and hope to work from there. But when planning your retirement, also keep in mind what you need that money for.
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A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not have to be difficult. 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.
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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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The post We’re 66 with $1.4 million in IRAs and $4,100 monthly from Social Security. What is our pension budget? first appeared on SmartReads by SmartAsset.
