For an average single person who wants to retire at age 64, a $1.2 million 401(k) account and $2,800 Social Security benefit could provide enough income to get by in retirement. Common guidelines suggest that your annual income may be around $81,600, which may or may not be more than your annual expenses. Much depends on individual circumstances, including the type of retirement lifestyle you want, your location and future trends in inflation, taxes and investment returns. For a detailed overview of your pension budget, you can ask a financial advisor.
Income and expenses represent the two sides of your retirement budget. Both are equally important and the decisions you make about each can affect the overall accuracy and reliability of the budget.
You can estimate expenses by using averages for typical retirees or by considering specifics of your situation with estimates for categories such as housing, health care and taxes. Likewise, you can estimate future income using general guidelines or by taking into account specific data such as your personal investment preferences.
In your case we start with the income, because we have information about that. Despite the possibility that Social Security benefits will be cut by about 20% after 2035, you can probably rely on your $2,800 Social Security benefit. And benefits are indexed to a cost-of-living benchmark, which provides protection against inflation.
However, keep in mind that if you wait to file for benefits, your monthly payment will increase every year until you are 70 years old. If you file at age 64 instead of waiting until your full retirement age of 67, you will receive 20% less. If you wait until age 70, you will get 24% more than at age 67. And you will receive the higher amount, adjusted annually for living expenses, for as long as you live.
Next, let’s look at your 401(k) income of $1.2 million. A commonly used approach uses the 4% guideline. This rule of thumb withdraws 4% from the retirement account balance in the first year, increasing that amount annually by the inflation rate. In your case, this means that you would withdraw €48,000 in the first year of your retirement.
If you add your $33,600 Social Security benefit to your $48,000 withdrawal, you get $81,600 in income. Actual income may vary if you are a more or less conservative investor, experience market volatility, or face other potential disruptions. Taxes or investment costs are also not taken into account. Overall, it’s a reasonable forecast and useful for planning, but it’s wise to be flexible and not assume you’ll have exactly that much each year.
A financial advisor can help you arrange your income for retirement. Talk to a financial advisor today.
You can estimate the cost as a percentage of your pre-retirement income. Some planners use this figure as 70%, although 55% to 90% may be more appropriate depending on personal circumstances.
If you use the 70% figure and assume your pre-retirement income is $65,000, which is about the average salary reported by the Bureau of Labor Statistics for earners in your age group, annual expenses could be $65,000. That’s $16,600 less than your estimated income, suggesting your retirement budget may have enough of a cushion. However, there are other factors to consider, including:
Personal goals. You’re probably not exactly average, and your individual lifestyle preferences will influence your spending. For example, if you want to take $5,000 worth of luxury cruises every year, that will eat up a large portion of your budget.
Location. Where you choose to retire also matters a lot. For example, if you live in San Francisco, where the cost of living is 84% ​​higher than the U.S. average, your annual expenses might be $45,500 times 1.84 or $83,720, leaving you with a budget deficit.
Housing. The largest expenses for retirees are housing, including rent, mortgage, property taxes, utilities, maintenance and other costs associated with housing. Again, location is a key factor. For example, the Bureau of Economic Analysis’ 2023 report on regional price parities put residential rents in California at 160.2 on the national index, while rents in West Virginia were just 53.9.
Inflation. Broad price increases undermine your purchasing power and can also affect investment returns. While it’s difficult to accurately predict future inflation, you can probably expect costs to rise faster in places where the cost of living is already high, which is another reason to consider a cheap location for your retirement.
Healthcare and long-term care costs. You become eligible for Medicare at age 65, so you only need to budget for private health insurance premiums for a year. However, after that, your post-retirement healthcare costs may still be significant. You may also want to consider how you will pay for long-term care, if necessary. The average annual premium for long-term care insurance for a 65-year-old man is approximately $1,175.
Taxes. Taxes normally drop when you retire, but they won’t disappear completely. In your first year of retirement, if you subtract the 2024 standard deduction of $14,600 for a single filer under age 65 from your $48,000 in retirement withdrawals, this will indicate taxable income on those withdrawals of $33,400. Adding half of your $33,600 in Social Security benefits, or $16,800, gives a combined income of $50,200. At that income level, 85% or $28,560 of your Social Security benefits are taxable. Your total taxable income is $33,400 plus $28,560 or $61,960. For the 2023 tax year, this would put you in the 22% marginal income tax bracket and result in a federal tax bill of $5,892. Future tax rates will be different and you may also owe state taxes.
Required Minimum Distributions (RMDs). You start taking RMDs when you are 73 years old. If you voluntarily withdraw a level of $48,000 per year from your 401(k) by then and earn an average of 7% annually on the remaining balance, your 401(k) will contain $1,626,606. According to the IRS tables, your RMD for the first year is $61,381. Depending on the future direction of inflation, that could be more than you take in if you use the 4% guideline. Because RMDs are taxable like voluntary withdrawals, this could affect the taxes you owe.
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A realistic retirement budget for a typical retiree using conventional guidelines might use $81,600 as an income figure in your case, and $45,500 in expenses. However, your own budget can vary considerably depending on your investment style, risk tolerance and preference for a more or less expensive lifestyle. Location, health care costs and the future of Social Security are just some of the other uncertainties involved in building a retirement budget, so it’s wise to build in a significant cushion.
To create a realistic retirement budget, consider working with a financial advisor. 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. You can also read SmartAsset reviews.
Don’t just guess what your RMDs will be once you’re 75. Use SmartAsset’s RMD Calculator to generate an estimate of your RMD based on official IRS tables.
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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