I’m 67 With $900k in My 401(k), $200k in Cash and $2,400 Social Security Benefit. What’s My Retirement Budget?
SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
From one perspective, by age 67 your retirement budget is largely set in stone. The accumulation phase of your working life is over, and whatever set of savings and benefits that you have is… well, what you have.
Looking at things that way, when it’s time to set your budget the next thing to do is run the numbers and see what kind of retirement your savings will bear.
Now, it isn’t always as tidy as that. If you don’t need all the money you have saved up, then you can consider charitable giving, estate plans or even growing your lifestyle. Or, if your needs significantly outstrip your potential income, it might be necessary to consider selling major assets, working in retirement, or moving to someplace with a lower cost of living. But for many households, your finances at a retirement will set your budget.
For example, let’s take an individual with $900,000 in their 401(k), $200,000 in a savings account and $2,400 per month in Social Security. Here’s how to look at your potential budget. You can also use this free tool to match with a financial advisor to discuss your strategy.
First, your Social Security benefits are a known quantity with some flexibility. At age 67 you are expecting $2,400 per month/$28,800 per year. That income will adjust for inflation.
However, you can boost this income by waiting to collect your benefits. After age 67, every month that you wait to begin collecting benefits will increase your lifetime benefits by a small amount. This increases until age 70, when you will receive the maximum benefits.
For anyone born in 1960 or later, this can increase to a maximum 124% of your full benefits at age 70. The SSA applies a different formula for retirees born before 1960, but for ease of use we will use the 124% figure since it applies to most people currently planning their retirements.
In this case, then, you could potentially increase your benefits up to $2,976 per month/$35,712 per year if you wait to begin collecting Social Security. This is a lifetime increase, so waiting to collect your benefits can generate a lot of money over time. However, it will also mean either delaying retirement or leaning more heavily on your investments for three years.
Right now, you have a combined $1.1 million spread across cash and investments. Your retirement budget will depend significantly on how you choose to manage that money.
Most broadly, this will be a balance of risk and reward. The more aggressively you invest, the higher your potential rate of return might be. This could give you a much higher income in retirement, but it will also expose your portfolio to much more volatility.
Story Continues
For example, say that you move everything into an S&P 500 index fund. Historically, the market has an average annual return of around 11%, giving you an average annual return of $121,000 (1.1 million * 0.11). If you sell off your portfolio’s gains each year, you could theoretically generate a combined retirement income of $149,800 starting at 67 ($121,000 + $28,800).
But, that’s just in theory. In reality the stock market is incredibly volatile. Some years you might generate more than 11%, and other years your portfolio might lose money. While an equity-forward strategy can be lucrative, you would need the flexibility to withdraw less money (and sometimes none at all) during down years in order to maintain your account’s core capital.
On the other hand, you could take one of the lowest-volatility options on the market and invest in a lifetime annuity. This is a contract that you buy from an insurance company or financial firm. In exchange for an up-front payment, the company will make guaranteed payments to you for the rest of your life. Here, a representative annuity might generate $7,243 per month/$86,916 per year. This could give you a combined income of $115,716 per year.
But, your income here would not be inflation adjusted. An annuity generally issues a flat payment, so your spending power will erode year-over-year. At a 2% – 3% inflation rate, you should expect the effective value of your annuity to fall in half roughly every 30 years. This can be an excellent plan for secure income that addresses longevity risks, as long as you have a plan to address inflation.
In between (and even beyond) these poles are countless ways to manage your money. A common approach is to invest for balanced security and growth, seeking a return between 6% and 8% in your portfolio. Other retirees try to invest for income, seeking a mix of interest and dividend payments that can generate indefinite income without drawing down on principal.
The easiest quick calculation is known as the 4% rule. In this approach, you invest for security, just enough to offset inflation. Then you plan to withdraw 4% of your portfolio each year for the next 25 years. Here, that would generate theoretical portfolio income of $44,000 per year for a combined income of $72,800.
However the 4% rule has seen increased criticism in recent years as too conservative. After all, even a representative annuity would pay almost twice as much, and exhausting your savings by age 92 does leave you with a not-inconsiderable amount of longevity risk. The 4% rule can be a good place to start making general estimates, but it might not be the most reliable approach overall.
The right financial advisor can help you weigh your tradeoffs and make appropriate investments for your goals. Match with a financial advisor today.
Finally, as you plan your retirement budget, make sure to anticipate taxes. This is an area where the separate nature of your accounts will become particularly relevant.
Your retirement budget will have three separate tax statuses.
Your 401(k), and any assets you buy with this money, will be subject to income taxes in retirement. This will apply to both principal and returns.
Your cash accounts, and any assets you buy with this money, will be subject to asset-specific taxes on profits or gains. For example, you will pay capital gains taxes if you sell stocks, but you might pay income taxes if they generate dividends.
Your Social Security benefits will be taxed based on your overall income. In this case, you will likely include 85% of your benefits in your taxable income for the year.
For example, say that you purchase an annuity with all of your money. In this case, you will have three separate taxable streams of income:
Qualified Annuity – Purchased with your 401(k) money, all income taxable
Non-Qualified Annuity – Purchased with your savings, only profits taxable
Social Security – Taxed based on your income, in this case 85% of your benefits taxed
These taxes will significantly reduce your spendable retirement budget, and it’s important to plan for that. Whatever your planned income stream, you will only actually keep a portion of it.
It’s also important to remember that required minimum distributions will begin at age 73. This will apply only to your 401(k) and any assets you purchase with this pre-tax money. Beginning at age 73 these RMDs will require you to withdraw a minimum amount from your portfolio each year. The exact amount will depend on your age and the amount in your 401(k).
For example, say that you have $900,000 still in your 401(k) and are 73. The IRS will require you to take at least $33,962 from this account by the end of the year. Failure to take your required minimum distribution will lead to a significant tax penalty. Remember, a financial advisor can help you navigate RMD rules, retirement planning, tax strategies and more.
As you make your retirement budget, it’s important to keep several moving pieces in mind. What kind of income can your portfolio generate? How does that match your risk tolerance and your spending needs? And how will you manage your taxes, especially if you have several different categories of savings?
It’s always helpful to start with a good example, so let’s do that. Here is what an average retirement budget looks like in the U.S.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Photo credit: ©iStock.com/Pekic
The post I’m 67 With $900k in My 401(k), $200k in Cash and $2,400 Social Security Benefit. What’s My Retirement Budget? appeared first on SmartReads by SmartAsset.
#900k #401k #200k #Cash #Social #Security #Benefit #Whats #Retirement #Budget