As you approach retirement, it’s important to start thinking about your budget in a more detailed way. You’ve likely spent many years saving up for retirement, but now that it’s near, you need to figure out how much money you’ll need to live comfortably. At 62, you may have $890,000 in your 401(k), $115,000 in your Roth IRA, and you may also qualify for Social Security benefits. With this, you likely have enough money to cover your living expenses during retirement. However, everyone’s situation is different, and you’ll need to make sure your plan is personalised to your own needs.
In this article, we’ll take a closer look at how to build a realistic retirement budget, focusing on Social Security benefits, investment income, and your retirement expenses. We’ll also discuss how you can make smart decisions to ensure a comfortable and financially secure retirement.
Understanding Social Security Benefits
Social Security is a crucial component of your retirement income. Most retirees rely on Social Security to help cover their expenses during retirement, and for good reason. Social Security benefits are guaranteed by the U.S. government, which makes them a reliable source of income. Additionally, they are adjusted each year to keep up with inflation, which can help protect your purchasing power.
The amount you receive from Social Security depends on several factors, including your work history and the age at which you start claiming benefits. If you continue to work, your benefits may increase, and delaying your claim could result in larger payouts in the future. Social Security benefits will vary based on your lifetime earnings, but typically, you’ll start seeing payments when you turn 62.
If you can, it’s a good idea to wait as long as possible to start collecting Social Security. The longer you wait, the more your benefit will be. However, in some cases, such as when a person expects a shorter life expectancy or faces health challenges, claiming earlier may make more sense.
For someone earning around $90,000 annually, their Social Security benefit could be around $29,508 per year starting at age 62. By waiting until age 70, the annual benefit may rise significantly, helping you have more income to cover your expenses.
Investment Income: Growing Your Nest Egg
Aside from Social Security, your investment income will play a key role in your retirement budget. The way you manage your investments as you near retirement will directly impact how much money you have available to spend.
If you’re planning to retire soon, you’ll want to use a more conservative investment strategy that focuses on protecting your savings and generating a steady income. If you plan to work until 70, on the other hand, you might consider a more aggressive strategy to help your investments grow.
For example, a balanced investment approach (combining stocks and bonds) might generate around 5% annual returns. A more growth-focused strategy, where 70% of your investments are in stocks and 30% in bonds, could theoretically return 10% annually. This approach could more than double your combined 401(k) and Roth IRA to $2.15 million in eight years.
If you prefer a safer route and decide to retire sooner, consider using the 4% safe withdrawal rule. This rule suggests that you can safely withdraw 4% of your total nest egg every year without running out of money.
If you have $1,005,000 in total retirement savings, the 4% rule would allow you to withdraw $40,200 in your first year of retirement. Over time, these withdrawals can increase slightly with inflation.
How to Estimate Retirement Expenses
Now that you know about income, it’s time to focus on your expenses. The key question is: How much will you need to live each year in retirement?
Retirees typically require approximately 75% of their pre-retirement income. If you currently make $90,000 per year, you’ll likely need about $67,500 annually after retirement. This estimate assumes that some of your costs (such as work-related expenses and retirement contributions) will be lower once you stop working.
However, other expenses could rise during retirement. For example, you may spend more money on healthcare, especially if you retire before you’re eligible for Medicare at age 65. Travel and leisure activities might also become a larger part of your spending.
To get a more accurate idea of your retirement budget, you’ll want to track your current spending. Start by listing all of your major expenses, including housing, food, utilities, and transportation. From there, you can make adjustments based on what you expect to spend in retirement.
Taxes and Other Considerations
Taxes are another important factor to think about when planning your retirement budget. In most cases, your Social Security income is partially sheltered from taxation. Additionally, your investment income won’t be subject to FICA payroll taxes once you’re retired. However, it’s still a good idea to plan for any taxes you may owe, especially on your 401(k) withdrawals.
One option to lower your taxes is to consider doing a Roth IRA conversion. In this case, you would transfer some or all of your 401(k) funds into your Roth IRA. While you would pay taxes on the converted amount, you wouldn’t have to pay fees when you withdraw from the Roth IRA in the future.
Bottom Line: Will $890,000 in Your 401(k) Be Enough?
At age 62, with $890,000 in your 401(k) and $115,000 in your Roth IRA, along with your Social Security benefits, it’s possible to retire comfortably without worrying about running out of money. However, how much money you will need depends on your lifestyle, expected expenses, and other personal factors.
The longer you wait to retire, the more your Social Security benefits will increase, and the larger your nest egg will become. It’s important to keep track of your spending, adjust for inflation, and make thoughtful decisions about when and how to withdraw money from your accounts.
If you need help making these decisions, speaking with a financial advisor can help you create a personalised retirement plan that suits your needs and goals.
In conclusion, having $890,000 in your 401(k), $115,000 in your Roth IRA, and Social Security benefits can set you on the right path for a comfortable retirement. But it’s crucial to take a realistic approach to your retirement budget. By understanding how much money you can expect from Social Security, carefully managing your investments, and estimating your future expenses, you can make informed decisions that will allow you to retire with peace of mind.
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