By definition, a budget includes both income and expenditure. The two halves of a budget are interdependent, so that if expenses increase, revenues must also increase. Otherwise the budget will not be balanced. Someone who wants to retire at age 62 and has $1.6 million in IRA and $2,800 in monthly Social Security benefits could start with an income estimate of about $97,600, based on a popular retirement fund withdrawal rate. In many cases this would be sufficient to finance a comfortable retirement, according to studies of retirees’ expenses. If individual lifestyle choices or other needs require more income, several strategies can provide this. If you’re modeling different financial scenarios for your retirement, consider talking to a financial advisor.
A common rule of thumb is to withdraw 4% of the principal from a retirement account in the first year of retirement and adjust that amount annually for inflation. For a $1.6 million IRA, that amount would be $64,000 in the first year. The following year, assuming 2% inflation, the withdrawal would be $65,280, and so on. Barring the unexpected, a retiree with a conservatively invested portfolio could do so for 30 years with little chance of running out of savings.
A monthly Social Security benefit of $2,800 equals $33,600 per year. Together with the $64,000 IRA withdrawal, a retiree in this situation could likely expect to make a total of $97,600 in the first year of retirement. Social Security is also adjusted for the cost of living, so the retiree’s income, which is $8,133.33 monthly, would likely remain about the same in terms of purchasing power. Still, you need to make sure this covers your expenses, including taxes.
There are a few different methods to estimate retirement expenses. One is to estimate expenses as a percentage of the retiree’s income in the last year he worked. The percentage used ranges from 55% to 90%, with lower income retirees typically using a higher percentage. A figure of 70% is one of the most commonly used figures. According to the Bureau of Labor Statistics, the average salary for someone between the ages of 55 and 64 was $63,544 in 2023. Thus, for an average 62-year-old retiree, using this approach suggests annual expenses of $63,544 times 70% or $44,480.80, well below the estimated annual retirement income of $97,600.
Another way to estimate expenses is to look at what retirees actually spend. According to surveys, average budgets for retirees range from about $24,000 per year to about $34,000 per year. Average budgets for retirees are significantly higher, most likely because the averages can be skewed by a smaller number of larger expenses. However, research into retirees’ actual spending once again shows that $97,600 a year could easily fund a comfortable retirement.
A more personalized approach is to estimate expenses based on retirees’ individual spending habits. To do this, a financial planner can collect data on current expenses and then adjust these figures based on likely needs in retirement. Adjustments usually involve reducing costs. For example, saving for retirement is likely to be a significant expense before you retire, ending at retirement. Income taxes may also be lower. Retirees do not owe FICA taxes on withdrawals or investment returns, and at least some Social Security benefits are also income tax-free.
However, it is likely that some expenses, such as health care, will increase in retirement. For starters, eligibility for Medicare doesn’t begin until age 65, so someone who retires at age 62 will have to pay premiums for private health insurance for three years. You also need to make sure your withdrawals are enough to meet the required minimum distribution requirements (RMD) in a pre-tax account such as your IRA.
If a retiree’s income and expenses don’t match, there are a number of ways to manage this. One of the most effective is delaying retirement. A 62-year-old is eligible for reduced Social Security benefits. However, claiming benefits at age 62 will reduce the amount paid by 30% compared to waiting until full retirement age at age 67. Waiting five years will also cause the IRA balance to increase. At an average annual income of 7%, $1.6 million grows to $2,244,083 in five years. Using the 4% withdrawal rate, this would increase annual withdrawals from $64,000 to $89,763 (not adjusted for inflation).
There are also options to reduce costs. Housing is both the largest and most variable expense for most retirees, taking up about a third of a retiree’s average income. Moving to a smaller home or moving to a cheaper part of the country can significantly reduce these major expenses and help balance the retirement budget. And if you need help making more detailed calculations for your own situation, you can use this free tool to match with a financial advisor.
It’s likely that a $1.6 million IRA and a monthly Social Security benefit of $2,800 will cover the cost of a comfortable and secure retirement for most retirees. However, much depends on individual preferences and circumstances. An expensive lifestyle or a special situation may require generating more income or cutting back on major expenses such as housing.
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A financial advisor can help you draw up a pension budget. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one 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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SmartAsset’s investment return and growth calculator can help you estimate how your portfolio will grow over time.
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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 isn’t 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 I’m 62 with $1.6 million in an IRA and Social Security of $2,800 per month. What is my pension budget? first appeared on SmartReads by SmartAsset.
