Planning for retirement can be both exciting and challenging. Figuring out how much you can realistically spend each year is an important piece of the puzzle. For example, a 62-year-old with $800,000 in savings and a monthly Social Security benefit of $2,600 can reasonably expect to earn $63,200 a year in retirement.
Figuring out how much income you can expect in retirement can be complicated, but a financial advisor can help. Contact a trustee today.
However, that amount can vary widely depending on your individual circumstances. One important variable is whether your $800,000 is in a taxable, tax-free, or tax-exempt account—or a combination of the three. In addition, how your funds are invested in those accounts has a significant impact on your financial future.
Income considerations
Social Security benefits are adjusted for inflation and have been paid without interruption since 1940. However, current projections suggest that benefits could be cut by 17 percent in 2035 unless Congress takes action to bolster the program’s trust fund.
Previous threats to Social Security have been fended off by raising taxes, extending the retirement age, and other changes that allow the program to continue paying benefits. There’s no way to know for sure whether Congress will do this again, but there are a number of solutions, including raising or eliminating the income cap on Social Security benefits, that are likely to work.
Assuming Social Security benefits are not reduced, a monthly benefit of $2,600 means you can expect a guaranteed income of $31,200 in the first year of your retirement.
The amount of income you could receive from your $800,000 portfolio would be less certain. The commonly used 4% safe withdrawal rate guideline calls for you to withdraw 4% of your savings in the first year of retirement and then adjust that amount for inflation. If you choose to follow the 4% guideline, you would have another $32,000 in income in the first year of retirement, with subsequent annual withdrawals increasing to reflect inflation.
Combining $31,200 in annual Social Security benefits with $32,000 in investment income results in $63,200 in pretax income. If you’re single and live in a place with an average cost of living, that may be enough to fund a comfortable retirement. According to the Census Bureau, the median real inflation-adjusted income for a head of household age 65 or older in 2022 was $50,290, about $12,910 less than our hypothetical scenario. However, a financial advisor can help you create a retirement income plan based on your individual needs and resources.
What types of accounts do you have?
Taxes can be one of your biggest expenses in retirement, and the type of accounts your $800,000 is in can determine the amount of tax you pay. If your savings are in a tax-free retirement account, such as a traditional 401(k), all withdrawals, including contributions as well as earnings, are taxed as ordinary income. Keep in mind that withdrawals from a tax-free retirement account increase your taxable income, which may cause some of your Social Security benefits to be taxed.
If your money is in a brokerage account or savings account without tax advantages, the growth of your account is subject to capital gains tax, ordinary income tax, or both. This income may also cause your Social Security benefits to be taxed. However, your original capital contributions are not taxed.
When you save with a Roth IRA or similar after-tax account, earnings accumulate tax-free and you also don’t have to pay income tax on withdrawals as long as you follow certain guidelines, including making your first Roth contribution at least five years earlier. This is the best-case scenario from a tax perspective because Roth withdrawals also don’t affect how your Social Security benefits might be taxed.
Strategically allocating your assets across different accounts with different tax statuses is called asset placement, and a financial advisor can help you implement this important strategy.
The importance of asset allocation
In addition to the type of account you use to save, how you invest the funds in the account is also very important. If you invested the entire $800,000 in bank certificates of deposit, you could earn $40,000 per year at a current interest rate of about 5% without touching the principal. You can’t expect to roll over CDs at those rates forever, but you could invest in 10-year U.S. Treasury bonds, which currently yield 4% annually. That would earn you the same $32,000 in income as you would at a 4% withdrawal rate without reducing the principal.
To counteract potential spikes in inflation that would reduce your purchasing power, you could invest in stocks. The S&P 500, for example, has historically returned an average of nearly 10% per year. However, this return also fluctuates significantly from year to year, so you can’t expect to reliably earn $80,000 year after year from your stock investments.
Traditional approaches to asset allocation can result in a portfolio that consists of cash, fixed income, and stocks, and may include other options such as fixed-rate annuities like the one offered by New York Life, which currently guarantees a lifetime return of over 7%. Diversified portfolios like these are widely considered the most reliable way to get the highest return on your assets, but if you need help choosing investments that meet your needs, contact a financial advisor and discuss it.
Other variables to consider
In addition to these choices, there are many other options available to you to increase your income or reduce your expenses. These include the following:
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Postpone retirement. Every year you continue working is another year for your savings to grow. Assuming an annual growth rate of 7%, if you wait just one more year, your $800,000 in savings will grow by $56,000 before taxes.
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Delay in social security. If you wait to claim Social Security after you reach your current age, the amount you receive each month for life will increase. If you wait until 67 to claim, your benefit would increase from $2,600 to $3,380.
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Reduce housing costss. Housing costs are the single largest expense for retirees, accounting for more than a third of the typical retiree’s budget. It’s also the cost that varies the most depending on where you live. By moving to a less expensive area or simply downsizing to a smaller apartment, you can significantly increase your retirement income.
Uncertainty is inevitable in retirement planning. Future inflation, tax rates, and your own health and life expectancy are important factors that can only be estimated. A carefully crafted retirement plan takes these factors into account and can address them with insurance and other tools to keep risk within acceptable limits. A financial advisor can help with this.
Bottom line
With $800,000 in savings and $2,600 in Social Security benefits at age 62, a conservative estimate puts you at about $63,200 in income. Depending on how the money is invested and what account it’s in, you may be able to earn even more. If necessary, you can keep working and delay taking Social Security for a year or two, or move to a less expensive area to earn more money.
Tips for retirement planning
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A financial advisor can help you do scenario modeling to see how different scenarios might play out. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview the advisors you find for free to help you decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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As you can see, a person’s preparation for retirement depends on many factors. Fortunately, SmartAsset’s free retirement calculator can help you estimate what income you can expect in retirement and whether it will be enough to cover your planned expenses.
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Have an emergency fund ready in case you have unexpected expenses in retirement. An emergency fund should be liquid – in an account that is not at risk of large fluctuations like the stock market. The downside is that the value of liquid cash can be eroded by inflation. However, a high-yield account allows you to earn compound interest. Compare savings accounts from these banks.
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