Planning for retirement can be exciting and challenging. Figuring out how much you can realistically spend each year is a key piece of this puzzle. For example, a 62-year-old with $800,000 in savings and a monthly Social Security benefit of $2,600 can reasonably expect an annual income of $63,200 in retirement.
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However, this number can vary greatly depending on individual circumstances. A key variable is whether your $800,000 is held in a taxable, tax-free or pre-tax account – or a combination of the three. Additionally, the way your funds are invested in these accounts significantly affects your financial outlook.
Income Considerations
Social Security Benefits are adjusted for inflation and have been paid without interruption since 1940. Current projections indicate that benefits could be reduced by 17% in 2035however, unless Congress acts to bolster the program’s trust fund.
Previous threats to Social Security were addressed by increasing taxes, extending the retirement age, and other modifications that allow the program to continue paying benefits. There’s no way to know for sure whether Congress will do this again, but a range of solutions, including increasing or eliminating the income limit for Social Security taxes are available and will likely work.
Assuming Social Security benefits aren’t reduced, a $2,600 monthly benefit means you could expect $31,200 in guaranteed income in your first year of retirement.
The amount of income you could receive from your $800,000 portfolio would be less certain. The commonly used 4% safe withdrawal rate The guideline calls for withdrawing 4% of your savings in the first year of your retirement and adjusting that number for inflation thereafter. If you plan to follow the 4% guideline, you’ll 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 gives you a pre-tax income of $63,200. If you’re single and live in a place with an average cost of living, this could be enough to fund a comfortable retirement. According to Census Bureau, the average real inflation-adjusted income for a householder aged 65 and over in 2022 was $50,290, about $12,910 less than what we would have in our hypothetical scenario. However, a financial advisor can help you create a retirement income plan based on your unique needs and resources.
What types of accounts do you have?
Taxes can be one of your biggest expenses in retirement, and the types of accounts that hold your $800,000 can dictate the taxes you pay. If your savings are in a pretax retirement account, like a traditional account 401(k), all withdrawals, including contributions and earnings, will be taxed as ordinary income. Keep in mind that withdrawals from a pre-tax retirement account will increase your taxable income, which may cause some of your Social Security Benefits to be Taxed.
If your money is in a tax-advantaged brokerage or savings account, your account growth will be subject to capital gains taxes, ordinary income taxes, or both. This income can also lead to taxes being applied to your Social Security benefits. However, your initial principal deposits will not be taxed.
If you save by using a Roth IRA or similar after-tax account, earnings accumulate tax-free, and you also won’t have to pay income tax on withdrawals as long as you meet certain guidelines, including making your first Roth contribution at least five years earlier. This is the most tax-friendly scenario, since Roth withdrawals will also have no impact on how your Social Security benefits are potentially taxed.
Strategically allocating your assets across different accounts with various tax statuses is known as asset tracking, and a financial advisor can help you execute this important strategy.
The importance of asset allocation
Along with the type of account you used to save, how you invest the funds in the account is also very important. If you invest all $800,000 in bank certificates of deposit, you could generate $40,000 per year without affecting the principal in current rates of around 5%. You can’t count on CDs renewing at these rates forever, but you can invest over 10 years US Treasury Notes, currently paying 4% per year. This would give you the same income of $32,000 as the 4% withdrawal rate without reducing the principal.
To combat potential inflation spikes that would reduce your purchasing power, you could invest in stocks. The S&P 500, for example, has historically returned an average of almost 10% per year. However, this return also fluctuates significantly from year to year, so you can’t expect to reliably earn $80,000 from your stock investments year after year.
Traditional approaches to asset allocation may result in a portfolio consisting of some cash, some fixed income securities and some stocks, possibly including other options such as fixed income securities. annuities like one of Life in New York currently guaranteed to pay more than 7% as long as you live. Diversified portfolios like these are generally considered the most reliable way to generate the highest return on your assets. But if you need help selecting investments that meet your needs, contact a financial advisor and talk about it.
Other variables to consider
In addition to these options, you may have a number of other options to increase your income or reduce your expenses, including the following:
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Delay retirement. Every year you continue working is another year your savings can grow. Assuming a 7% annual growth rate, your savings of $800,000 will increase by $56,000 before taxes if you wait just one more year.
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Delay Social Security. Waiting to Claim Social Security After your current age increases the amount you will receive each month for the rest of your life. If you delay claiming until age 67, your $2,600 benefit will increase to $3,380.
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Reduce housing expensesS. Housing is the biggest cost for retirees, accounting for more than a third of a typical retiree’s budget. It is also the expense that varies most depending on location. Per move to a less expensive area or simply downsizeyou can significantly increase the scope of your retirement income.
Uncertainty is inevitable in retirement planning. Future inflation, tax rates and your own health and longevity 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. That’s where a financial advisor can help.
Conclusion
With $800,000 in savings and $2,600 in Social Security benefits at age 62, a conservative estimate gives about $63,200 in income. You may be able to generate more income depending on how the money is invested and the type of account it is in. If necessary, you can continue working and delay claiming Social Security for a year or two, or move to a less expensive area. to make your income go further.
Retirement Planning Tips
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A financial advisor can help you do scenario modeling to see how different scenarios could play out. Free SmartAsset Tool matches you with up to three financial advisors in your area, and you can interview your advisors at no cost to decide which one is right for you. If you are ready to find a consultant which can help you achieve your financial goals, start now.
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As you can see, a lot depends on a person’s preparation for retirement. Fortunately, SmartAsset is free retirement calculator can help you assess how much income you can expect to have in retirement and whether it will be enough to support your projected expenses.
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Keep an emergency fund in case you have unexpected expenses in retirement. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuations like the stock market. The downside is that the value of liquid money 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 I am 62 years old, have $800,000 and will receive $2,600 monthly from Social Security. What is my retirement budget? appeared first on SmartReads by SmartAsset.
