For the average single person planning to stop working at 64, a $1.2 million 401(k) account and a $2,800 Social Security benefit can provide enough money to support themselves during retirement. The most commonly used guidelines indicate that your annual income may be $81,600, which may or may not exceed your annual income. 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 complete workup of your retirement budget, ask a financial advisor.
Income and expenses represent the two sides of your retirement budget. Both are equally important and the decisions you make over the other can affect the overall accuracy and credibility of the budget.
You can estimate spending by using averages for typical retirees or by considering your circumstances and estimates for areas such as housing, health and taxes. Similarly, you can estimate future income with general guidelines or by accounting for specifics such as your investment preferences.
In your case, we will start with money since we have information about that. Although there is a chance that Social Security benefits will be cut by 20% after 2035, your $2,800 Social Security benefit can be relied upon. And benefits are tied to a cost-of-living benchmark, providing protection against inflation.
Note, however, that if you wait to claim benefits, your monthly income will increase each year until you are 70. By claiming at age 64 instead of waiting until your full retirement age of 67, you are getting 20% less. If you wait until the age of 70, you will get 24% more than at 67. And you will receive a higher income, adjusted annually for living expenses, as long as you live.
Next, let’s look at the money from your $1.2 million 401(k). Another common method uses the 4% guideline. This rule of thumb is to withdraw 4% of the retirement account for the first year, increasing the amount each year by the inflation rate. In your case, this means you withdraw $48,000 in the first year of retirement.
Adding your $33,600 Social Security benefit to your $48,000 withdrawal gives you $81,600 in income. The actual amount may vary if you are a more or less conservative investor, experiencing market volatility or encountering other disruptions. It also does not include taxes or investment costs. Overall, it’s a reasonable estimate and useful for planning, but it’s wise to be flexible and not assume you’ll have exactly that every year.
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You can balance the money as part of your pre-retirement income. Some planners use 70% of this number, although 55% to 90% may be appropriate depending on the individual’s circumstances.
Using the 70% figure and assuming your pre-retirement income is $65, which is the median salary reported by the Bureau of Labor Statistics for earners in your age group, the annual income could be $65. That’s $16,600 less than your estimated income, indicating that your retirement budget may have enough of a cushion. However, there are some things to consider, including:
Personal goals. You are not exactly in the middle, and your personal lifestyle will affect your finances. For example, if you want to take a $5,000 luxury trip every year, that will eat up a lot of your cushion.
Location. Where you choose to retire is also very important. For example, if you live in San Francisco, where the cost of living is 84% higher than the US average, your annual income would be $45,500 times 1.84 or $83,720, putting you in a budget deficit.
Housing. A major retirement expense is housing, which includes rent, mortgage, property taxes, utilities, maintenance and other living expenses. Again, location is a big factor. For example, the 2023 Bureau of Economic Analysis report on regional rents ranked California’s rents at 160.2 on the national index while West Virginia’s rents were only 53.9.
Inflation. Price increases affect your purchasing power and can affect your return on investment. While it’s difficult to accurately predict future inflation, you can expect prices to rise faster in areas that already have a high cost of living, which is another reason to consider a low-cost area for retirement.
Health and long-term savings. You will be eligible for Medicare at 65, so you only need to budget for a private health insurance premium for the year. After that, however, your health care costs in retirement can remain significant. You can also think about how you will pay for long-term care if needed. Average annual premiums for long-term care insurance for a 65-year-old man are about $1,175.
Taxes. Taxes are usually lower in retirement but they don’t go away completely. In your first year of retirement, subtracting the 2024 standard deduction of $14,600 for a filer under age 65 from the $48,444,000 deduction shows the amount charged on that deduction of $3,400 . Adding half of your $33,600 in Social Security benefits, or $16,800, yields a combined income of $50,200. At that income level, 85% or $28,560 of your Social Security benefits will be taxable. Your total taxable income comes to $33,400 and $28,560 or $61,960. For the 2023 tax year, this puts you in the 22% tax bracket and results in a $5,892 federal tax bill. Future tax rates will be different, and you may also owe state taxes.
Required Minimum Distributions (RMDs). You start taking RMDs when you reach 73. At that point, assuming you commit to withdrawing a maximum of $48,000 annually from your 401(k) and earning an average of 7% annually on the remainder, your 401(k) will have $1,626,606. According to the IRS tables, your first annual RMD will be $61,381. Depending on the future direction of inflation, that could be more than you are withdrawing if you are using the 4% policy. Since RMDs are taxed as voluntary withdrawals, these can affect the taxes you owe.
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A realistic retirement budget using the standard rules would use $81,600 in personal income, and $45,500 in expenses. However, your personal budget may be different depending on your investment style and risk tolerance and preference for an expensive or inexpensive lifestyle. Location, health care costs and the future of Social Security are some of the other considerations involved in creating a retirement budget, so it’s wise to build in a large savings.
If you want to put together a realistic retirement budget, consider working with a financial advisor. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with three financial advisors in your area, and you can interview your advisor matches 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, start now. You can also read SmartAsset reviews.
Don’t just guess what your RMDs will be when you reach age 75. Use SmartAsset’s RMD Calculator to create an estimate of your RMD based on the official IRS tables.
Keep an emergency fund available for unexpected expenses. An emergency fund should be liquid – in an account that is not as vulnerable to large fluctuations as the stock market. The tradeoff is that the financial value of water can be reduced by inflation. But the high-interest account allows you to earn more interest. Compare savings accounts from these banks.
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The post I’m 64 with $1.2 Million in a 401(k) and a $2,800 Social Security Benefit. What’s My Retirement Budget? first published on SmartReads and SmartAsset.
