For the average single person who plans to stop working at age 64, a $1.2 million 401(k) account and a $2,800 Social Security benefit could provide enough income to get by in retirement. Widely used guidelines assume your annual income could be around $81,600, which may or may not exceed your annual expenses. Much depends on individual circumstances, including the type of retirement lifestyle you want, where you live, and future inflation, tax, and investment return trends. For a comprehensive breakdown of your retirement budget, consult a financial advisor.
Retirement budget basics
Income and expenses represent the two sides of your retirement budget. Both are equally important, and decisions you make regarding either side can impact the overall accuracy and reliability of the budget.
You can estimate your expenses using averages for typical retirees or by taking your individual circumstances into account with estimates for categories such as housing, healthcare and taxes. Likewise, you can estimate future income using general guidelines or by taking into account specifics such as your personal investment preferences.
Your retirement income
In your case, we’ll start with income, since we have information on that. Despite the possibility that Social Security benefits will be cut by about 20% after 2035, you can probably count on your $2,800 Social Security benefit. And benefits are tied to a cost-of-living benchmark, which provides protection against inflation.
But keep in mind that if you wait until you’re 70 to claim benefits, your monthly amount will increase each year. If you claim benefits at 64 instead of waiting until your full retirement age of 67, you’ll get 20% less. If you wait until age 70, you’ll get 24% more than you would at 67. And you’ll get the higher amount, adjusted annually for cost of living, for as long as you live.
Next, let’s look at the income from your $1.2 million 401(k) plan. A common approach uses the 4% guideline. This rule of thumb calls for withdrawing 4% of the retirement account balance in the first year, with that amount increased annually by the rate of inflation. In your case, that means you would withdraw $48,000 in the first year of your retirement.
If you add your Social Security benefit of $33,600 to your $48,000 payout, you get an income of $81,600. Actual income may vary if you are a more or less conservative investor, experience market volatility, or encounter other potential disruptions. It also does not take into account taxes or investment fees. Overall, this is a reasonable projection and useful for planning, but it is wise to be flexible and not assume you will have exactly this much each year.
A financial advisor can help you manage your income for retirement. Talk to a financial advisor today.
Your expenses in retirement
You can estimate expenses as a percentage of your pre-retirement income. Some planners use 70% as a percentage, although 55% to 90% may be more appropriate depending on personal circumstances.
If you use the 70% figure and assume your pre-retirement income is $65,000, which is roughly the median salary reported by the Bureau of Labor Statistics for earners in your age group, annual expenses could be $65,000. That’s $16,600 less than your estimated income, suggesting your retirement budget may have plenty of room. However, there are other factors to consider, including:
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Personal goals. You’re probably not exactly average, and your individual lifestyle will influence your spending. For example, if you want to take a $5,000 luxury cruise every year, that’s going to eat into a big chunk of your buffer.
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Location. Where you retire also plays a big role. For example, if you live in San Francisco, where the cost of living is 84% higher than the U.S. average, your annual expenses could be $45,500 x 1.84, or $83,720, resulting in a budget deficit.
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Housing. The largest single expense for retirees is housing, including rent, mortgage, property taxes, utilities, maintenance, and other housing-related costs. Again, location is a key factor. For example, the Bureau of Economic Analysis’ 2023 Regional Price Parities report put California’s apartment rents at 160.2 of the national index, while in West Virginia they were only 53.9.
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Inflation. Big price increases erode your purchasing power and can also impact your return on investment. While it’s difficult to accurately predict future inflation, you can probably expect costs to rise faster in places that already have a high cost of living. This is another reason to consider a low-cost place for your retirement.
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Health and care costs. At 65, you’ll be eligible for Medicare, so you’ll only need to budget for one year of private health insurance premiums. After that, however, your healthcare costs in retirement can still be significant. You’ll also want to think about how you’ll pay for long-term care if it becomes necessary. The average annual long-term care insurance premium for a 65-year-old man is about $1,175.
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Steer. Typically, taxes go down in retirement, but they don’t disappear completely. In your first year of retirement, if you subtract the $14,600 standard deduction for singles under 65 for 2024 from your $48,000 in retirement earnings, that gives you $33,400 in taxable income for those earnings. Adding half of your $33,600 in Social Security benefits, or $16,800, gives you total income of $50,200. At that income level, 85%, or $28,560, of your Social Security benefits are taxable. Your total taxable income is $33,400 plus $28,560, or $61,960. For the 2023 tax year, that would put you in the 22% marginal tax bracket and give you a federal tax bill of $5,892. Future tax rates will be different and you may also have to pay state taxes.
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Required minimum distributions (RMDs). You start taking RMDs when you’re 73. Then, if you voluntarily withdraw $48,000 from your 401(k) account each year and earn an average of 7% on the balance each year, your 401(k) will contain $1,626,606. According to IRS tables, your first-year RMD will be $61,381. Depending on future inflation trends, this could be more than you withdraw if you use the 4% guideline. Since RMDs are taxable just like voluntary withdrawals, this could affect the taxes you pay.
Get connected with a financial advisor who can provide professional advice on your retirement goals.
Bottom line
A realistic retirement budget for a typical retiree following traditional guidelines might include $81,600 in income and $45,500 in expenses, but your own budget could look very different depending on your investment style and risk tolerance, as well as your preference for a more or less expensive lifestyle. Where you live, healthcare costs, and the future of Social Security are just some of the other uncertainties that come with creating a retirement budget, so it’s wise to build in a sizeable buffer.
Tips
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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 hard. 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. You can also read SmartAsset reviews.
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Don’t just guess what your RMDs might be when you’re 75. Use SmartAsset’s RMD calculator to get an estimate of your RMD based on official IRS tables.
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Have an emergency fund ready in case unexpected expenses arise. An emergency fund should be liquid – in an account that is not exposed to the 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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