Making a retirement budget calls for considering not only income but also expenses. With $2,700 monthly from Social Security and $715,000 in 401(k) accounts invested and distributed conservatively, a couple may be able to expect about $61,000 in annual income. This is close to the annual expense level reported by the average retiree. However, individual retiree couples may have significantly higher or lower expenses based on individual situations. A more customized spending plan might account for past and predicted outlays for major cost categories such as housing, food, transportation, healthcare and taxes. To ensure your retirement budget aligns with your long-term goals and financial situation, schedule a consultation with a qualified financial advisor today.
A retirement budget is an outline of the expenses and income a retiree can expect after leaving the workforce. Creating a retirement budget is a key part of retirement planning. It helps identify potential financial pinches when cash could run short, and accounts for taxes along the way. It can also suggest solutions, such as trimming expenses or increasing income.
The goal of a retirement budget is to balance income and expenses. It should include a cushion of excess income over expenses to help provide for the unexpected. Flexibility is another vital component. No matter how carefully a budget is prepared, it’s a plan subject to modification and not an iron-clad course of action.
Retiree budgets resemble budgets used to plan the financial affairs of businesses, governments and pre-retirement households, but differences exist. Without jobs generating wages and salaries and the possibility of increasing earnings with overtime or bonuses, retirees may have less flexibility with regard to income than people still working. Retirees also generally have lower expenses for common categories such as housing, education, childcare and, of course, retirement saving.
On the income side, Social Security is a central part of most retiree budgets. A $2,700 combined Social Security income is equal to $32,400 in annual income. While there is a chance Social Security benefits will be significantly reduced around 2035, the program’s long history of uninterrupted payments coupled with the government’s taxing authority suggests it is as reliable as any income source including investments. Social Security benefits also adjust annually to reflect cost of living changes, so it’s inflation-protected.
The income potential of $715,000 in 401(k) plans is less clear-cut, but it’s possible to create a generally trustworthy estimate using the 4% rule. This guideline assumes a retiree can withdraw 4% of the principal in a retirement account each year, adjusting annually for inflation, without running out of money for at least 30 years.
This would take a 66-year-old couple to age 96, approximately the life expectancy used in many retirement plans. Adding 4% of $715,000, or $28,600, to $32,400 from Social Security completes the income side of this budget with a total of $61,000.
The nest egg may be able to produce more income if needed. The 4% guideline assumes a conservative investment strategy equally balanced between fixed-income and equity securities. A more aggressive approach emphasizing equities could generate more income, while also assuming more risk. Another option is to investing a portion of the portfolio in annuities, which can produce higher rates of guaranteed income at the cost of paying additional fees and losing access to the principal.
For help building a tax-efficient income plan for your retirement income, consider matching with a financial advisor.
Planners use a variety of approaches to estimate retirement expenses, including looking at typical retiree expenses. Studies of median individual retiree spending find figures ranging from less than $24,000 annually to more than $34,000 annually. This suggests this budget’s projected income would be more than adequate for a two-person household.
For a more somewhat more personalized approach, consider using a percentage of pre-retirement income. Some planners use figures ranging from 55% to 90% here. Using 75%, assuming pre-retirement household income matches the $77,345 median household income across the United States, the spending budget would be $77,345 times 75% or approximately $58,009. That’s more than budgeted income but doesn’t leave much cushion.
Another method is to create a line-item expense budget accounting for every major category of cost. Some of the largest household expenses for many retirees includes:
Housing
Transportation
Healthcare
Food
Other
Taxes
Entertainment
Apparel
Housing is by far the largest item, accounting for more than a third of the typical retiree budget. It’s also one of the most variable costs and depends greatly on location and home size. This suggest that downsizing or relocating to a less costly city or region may offer a solution to budget pinch. Healthcare, while not the largest item, is likewise significantly variable and, unlike other costs, will probably increase with age.
Taxes tend to be more favorable for retirees because Social Security benefits are partly or completely free of income taxes, and FICA taxes are not due on investment income. At a joint of income of around $61,000, you’ll likely owe income taxes on 85% of your Social Security benefit. And your 401(k) withdrawals including Required Minimum Distributions (RMDs) are taxed as ordinary income so this expense won’t completely disappear.
If you’re interested in building an appropriate retirement plan based on your personal circumstances and goals, you can get matched with up to three fiduciary financial advisors.
A couple with $715,000 in 401(k) accounts and $2,700 from Social Security can probably craft a retirement budget that appropriately balances income and expense. A sustainable income plan will likely produce about $61,000 from investments and benefits, which is slightly more than the budget for expenses in a typical retirement household but your mileage may vary. Despite the appearance of a balanced budget from this simplified analysis, it’s important to be flexible and prepare to consider ways to generate more income, if necessary, as well as to cut expenses by trimming outlays for major cost categories.
Consulting with a financial advisor can provide personalized recommendations and strategies to help you achieve a secure and comfortable retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost 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.
Use SmartAsset’s Retirement Calculator to estimate your income and expenses in retirement.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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The post We’re 66 With $715k in 401(k)s and $2,700 Social Security Between Us. What’s Our Retirement Budget? appeared first on SmartReads by SmartAsset.
Dena Holloway is a writer, editor, and content creator based in the United States. She has written for a variety of publications, including Men With Wings Press, where she covers arts, automotive, travel, and fashion. She's also a certified yoga instructor and works as a freelance copywriter.
