SmartAsset and Yahoo Finance LLC may earn commission or income by linking to the following content.
Say that as a married couple, you have $1.4 million in your IRAs and, at age 66, expect about $4,100 per month in Social Security. Based on some general rules of thumb, you might plan on a retirement income of about $108,000 per year, but how much you actually need and can afford will depend on your specific circumstances.
Here’s how to think about it, including crunching the numbers. And if you want someone to double-check your retirement accounts, consider setting up a financial advisor for free.
A frequent commentator on this piece, Kevin Caldwell, managing director of asset management firm Golden Road Advisors, refers to retirement planning as an approach in “buckets.” As you prepare for retirement, it’s good to think about your budget for specific areas of life. One way to set this up is:
-
requirements
-
lifestyle
-
hope
-
real estate
Your bucket of needs is the amount of money that, at a minimum, you need to survive. What is the income that needs to come in each month to keep the food warm and pay the bills?
Your lifestyle bucket is the money you actually want to live the life you enjoy. It’s not money for big, new things. Rather, it is money to go to your favorite restaurants and take your regular trips.
Your wish bucket is the money that ideally allows you to add to or expand your life. That’s money for a new boat to sail around the world or retire at age 60.
Ultimately, your property bucket is money for everything you intend to give up. If there are people who need you, or just something you care about, this is how you plan for it.
Thinking about retirement this way can lighten the budget. An experienced financial advisor can help you create a plan that covers all the bases.
If your retirement income doesn’t meet the bucket of needs, you simply can’t afford to retire, not yet. You will miss the house. If it just meets the requirements, then you can technically be able to retire, but you should wait if possible.
If your retirement income matches your lifestyle, you should generally be fine. You can probably retire comfortably, provided you have proper risk management in place, including long-term care insurance. The same is true if your retirement income meets the expected bucket, in which case good for you.
And the wild card is your real estate bucket. It depends on your individual circumstances. Some retirees have dependents or liabilities, which is why they have to leave a minimum of assets. Others simply want to leave something for their loved ones. This is the situation.
Then, you have to match your budget with your income.
Your retirement income will come from your joint benefits, pensions and assets. For many families, this typically means retirement accounts and Social Security. In our example here, let’s say you’re a married couple with $1.4 million in your IRAs. You are 66 and can currently collect $4,100 in Social Security benefits.
Let’s start with Social Security. At 66, you will have collected 93.3% of your full benefits. If you wait until age 67, you can increase your annual Social Security income to $52,733 each year. Since this increase will last for the rest of your life, it is likely to wait if you can. (If you wait until age 70 to collect Social Security, you can increase your lifetime benefit even more, to $65,388 a year.)
Then there are your IRAs. There are many ways to think about portfolio income. The standard option is the 4% rule. Under this logic, you assume a combination of safe investments and inflation-adjusted withdrawals that result in a 4% withdrawal over 25 years. Starting with $1.4 million, that would give you about $56,000 a year.
This brings us up to our number. Combined, your full Social Security benefits and the 4% IRA withdrawal rate will come to about $108,733 in inflation-adjusted income per year.
Talk to a financial advisor Present your retirement budget for free.
That said, there are many ways to think about portfolio income. For example, you can use this portfolio to buy a life annuity. This annuity may generate about $112,584 per year ($9,382 per month). That’s significantly more than the 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, placing more equities in your portfolio for a growth rate closer to 4% than 8%. This may give you significantly more income over time, but also at the cost of significantly more volatility.
It all depends on your personal situation and risk capacity.
Finally, there are your exit requirements.
First, make sure to keep track of your RMDs. This is the minimum amount you should withdraw from your portfolio every year starting at age 73. For example, take a burn rate of 4%. At age 73 you’ll have about $1.12 million left in your IRAs, starting at $42,264 RMD. Given that your projected income is likely higher than this, the RMD rule probably won’t be an issue, but it’s important to keep in mind.
Then there are taxes. You will pay full income tax on all earnings withdrawn from an IRA just like ordinary 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, be sure to prepare for the special needs that retirement brings. When you retire, many different structures in your life change. On the one hand, you can expect your income requirements to decrease. Most families spend less in retirement, and not devoting money to retirement savings will empty a significant portion of your budget (between 5% and 10% for most families). On the other hand, you will incur new expenses. 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 spouse has residential needs in the future). When you run the math on your needs and lifestyle expenses, be sure to account for expenses like these.
Finally, don’t forget inflation, especially if you rent your home or live in a high-cost urban area. Even at the Federal Reserve’s 2% benchmark, rates roughly double every 30 years. Social Security is standardized to this, and so are many income strategies, but it’s important to keep in mind.
For professional insight into your own retirement plan, you can get adjusted and Talk 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 can expect a retirement income of about $108,000 a year. What your actual retirement budget is, though, depends entirely on your lifestyle and needs.
-
Retirement budgeting should start with your expenses and needs, as much as your income. Most families start with their own portfolio and hope they can work their way back up from there. But as you plan for your retirement, be sure to keep an eye on what you need that money to do.
-
A financial advisor can help you create a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.
-
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
-
Are you looking for a financial advisor to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.
Photo credit: ©iStock.com/Rawpixel Ltd
The post We are 66 with $1.4 million in IRAs and $4,100 a month from Social Security. What is our retirement budget? First appeared on SmartReads by SmartAsset.
