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To truly put together a comprehensive retirement budget as a couple, you’ll need to consider both potential income sources and realistic expenses. While it is possible to establish an income estimate or income range from these figures, the spending side of the budget is just as important and potentially much more variable. Other variables include when you plan to retire, whether you have other sources of retirement income and how you want to plan to manage hard-to-predict expenses, such as health care and long-term care costs.
To get a complete picture of your expenses and income in retirement, consider speaking to a financial advisor.
Since 65 is within the normal retirement age range, you may well consider retiring immediately. If so, you’ll need to generate your investment-based income from the $1.9 million you currently have in your retirement accounts. If you were willing and able to wait a few years, this amount could increase somewhat and allow you to increase your retirement income.
Specifically, if you wait until your full retirement age, 67, your Social Security benefit will also increase. However, right now, a nest egg of this size and the Social Security benefits described could generate a solid retirement income.
The 4% rule is a historical rule of thumb that you can use to start thinking about how much you can safely withdraw from your retirement investments each year. It uses a conservative strategy in some markets, or too aggressive in others, so there are risks in following this rule on both sides. However, the same can be said for any path you might choose.
Applying this rule suggests you could withdraw 4% of your $1.9 million in the first year and a similar amount, adjusted for inflation, each year thereafter for 25 years, although this doesn’t take into account potential gains. In this limited example, that means you would withdraw $76,000 in the first year. Then, if inflation hits 3% the following year, your withdrawal will increase by the same amount to $78,280.
On an annual basis, your combined Social Security benefits are $62,400, or $5,200 per month. Combined with the $76,000 from investments, your total income would equal $138,400 in the first year. Depending on the lifestyle you want to maintain as a retiree, this should offer you some flexibility as a couple.
For many retirees, $138,400 per year is enough income to live a comfortable life. In the absence of details on spending habits, another rule of thumb can be applied. Multiplying pre-retirement income by a percentage is one way to determine the likely need for income after retirement. This percentage can vary from 70% to 90% or more, depending on the retiree.
In this case, let’s assume that 80% is accurate for you and your spouse. If so, $138,400 would be enough to maintain your pre-retirement lifestyle if you earned about $172,000 combined per year before retiring. If you’re used to living on more than that, you may need to reduce your pension.
Talk to a financial advisor today about retirement planning.
Since you don’t have a Roth IRA, you will have to pay income tax in retirement. Under the 2024 tax rules (which will undoubtedly change in future years), you could use the $32,200 joint standard deduction available to married couples when both spouses are 65 or older. This would reduce your taxable income to $106,200.
Since your taxable income is more than $34,000, you will have to pay taxes on 85% of your Social Security income. This means that only 15%, or $9,360, of your Social Security income will be tax-free. So now your taxable income is $96,840 after all deductions.
Using 2024 tax brackets, $96,840 of taxable income puts you, at the highest level, in the 22% bracket. At this income level, your tax bill will be approximately $11,715 in the first year.
At age 73, you will begin taking required minimum distributions (RMDs) from your retirement accounts. Using the IRS table to calculate these distributions, your first-year RMD will be $71,698.
RMD income is taxable, so this income could have tax implications. However, the $71,698 RMD amount is less than the amount you will withdraw in the first year of retirement. So RMDs are unlikely to have much effect on your tax bill as a retiree, barring circumstances one way or another.
Your retirement plan may also want to consider long-term care. A 2021 Genworth Financial Cost of Care Survey found that annual costs for a semi-private room in a skilled nursing facility could reach $94,000 per year, and that amount will likely continue to rise each year. This represents more than two-thirds of your entire expected income for the first year, so a long stay at one of these establishments could be a significant financial problem.
To protect yourself from these potential costs, you may want to consider long-term care insurance. Be aware that premiums aren’t cheap, especially if you start later in life. Prices rise sharply with age and it may be difficult to get it if you are over 70 or in poor health.
A financial advisor can help you develop a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with licensed financial advisors who serve your area, and you can have a free introductory call with your advisors 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 use SmartAsset’s retirement calculator to generate what-if scenarios that can help you decide if you can retire safely.
Keep an emergency fund on hand in case you face unexpected expenses. An emergency fund should be liquid – in an account that doesn’t have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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The Post We’re 65 years old with $1.9 million in a 401(k) and IRA, and $5,200 a month from Social Security. What is our retirement budget? appeared first on SmartReads by SmartAsset.
