In your early 60s, for most households, attention shifts from wealth accumulation to wealth management. You have a few more years to put the finishing touches on your retirement savings, at which point, it will be time to start taking structured withdrawals. This can be a good opportunity to start looking at how you’ll manage those assets and set a budget.
Let’s look at an example. Say that you’re 60 years old with $920,000 in retirement savings. You’re expecting $2,250 in Social Security benefits at age 67. What’s a solid, sustainable retirement budget? Here’s what to consider.
If you need help creating a personalized retirement budget or plan, considering working with a financial advisor.
Review Social Security
We’ll start with Social Security. Here, your full benefits are set at $2,250 per month, or $27,000 per year starting at age 67. You can increase that by up to 24% by delaying benefits up until age 70. You can also collect benefits early, although this reduces your benefits, down to 70% of full benefits if you begin collecting at age 62. In both cases, the adjustment is permanent. Here, your minimum, full and maximum benefits would be:
- Age 62: $1,575 per month/$18,900 per year
- Age 67: $2,250 per month/$27,000 per year
- Age 70: $2,790 per month/$33,480 per year
In general, it’s a good idea to avoid taking Social Security early, if you can avoid it. You could, in theory, collect your benefits early and use this as a form of investment capital through your 60s. If you collect benefits at age 62, for example, your benefits will decrease by 6 points each year. That’s a 30% total reduction over five years. Theoretically, if you can invest the money at a rate of return higher than 6%, you could come out ahead. But it’s risky.
The problem is this also ignores the reliability of Social Security. The main advantage of Social Security benefits is that you can count on a minimum, inflation-adjusted income for life. Reducing those benefits in exchange for uncertain portfolio gains is often a poor tradeoff.
In fact, you might be better off going the other way. Delaying benefits would allow you to collect the lifetime increase. You could then supplement that missing income by taking extra withdrawals from your portfolio.
Here, for example, say that you delayed Social Security until age 70. You would take an extra $27,000 per year from your portfolio at ages 67, 68 and 69 to make up for the benefits you are not collecting. That’s a total of $81,000 in extra withdrawals. You would then gain an extra $6,480 per year in increased benefits starting at age 70. After 12 years, you would likely come out ahead, collecting more in benefits than you took in additional portfolio withdrawals.
Your tradeoff would be the opportunity cost of portfolio withdrawals for the lifetime security of higher benefits. A financial advisor can help you determine which strategy is best for you.
Review Your Tax and RMD Issues
Next, look at your taxes and related RMD requirements.
With this profile, your retirement budget will depend significantly on what kind of retirement portfolio you hold. If you have a pre-tax portfolio, like a 401(k) or a traditional IRA, then your budget will need to anticipate paying income taxes on all the withdrawals you take (principal and returns). You’ll also need to prepare for required minimum distributions (RMDs) starting at age 73.
It’s unlikely that your RMDs will exceed your withdrawals. For example, with a $950,000 portfolio at age 73, your RMD would only be around $36,000. But it’s important to remember that this requirement exists.
If you have a post-tax portfolio, like a Roth IRA or a Roth 401(k), then you do not have to account for income taxes on withdrawals (neither state nor federal taxes, neither principal nor returns). You also won’t have required minimum withdrawals. Since Roth withdrawals don’t count toward your total taxable income, this can also reduce your Social Security benefits taxes and possibly your Medicare premiums, as well.
A financial advisor can help you create a plan that takes into account your tax liability.
Consider Your Investments and Budget
Now, look at your spending and income.
The rule of thumb when it comes to retirement is that you should budget for about 80% of your pre-retirement income to maintain your pre-retirement standard of living. Among other things, this accounts for both your reduced rate of saving (you don’t need the extra income to set aside for retirement anymore) and the fact that most retirees have fewer overall commitments.
However, you’ll also need to account for some new spending concerns. Most notably, make sure to anticipate additional health care costs. Your out of pocket spending will increase as you age and have more medical needs. You’ll also need to account for gap insurance – because Medicare doesn’t cover everything – and long-term care insurance in case you need it.
You should also anticipate inflation, which will erode your spending power year-over-year if unaddressed. Generally the best way to do this is by budgeting for 2% increases to your annual portfolio withdrawals. This will account for the Federal Reserve’s benchmark annual inflation rate. If you live in a high-cost urban environment, expect costs to increase somewhat more quickly and budget your stepped-up withdrawals accordingly. This is particularly true if you rent your home, as urban rents have historically increased significantly faster than general inflation.
Compare this against your possible income.
Here, you’re 60 years old with $920,000 in retirement savings. Setting aside ongoing contributions, at an 8% annual rate of return, this could give you about $1.57 million by age 67. You also have a baseline full benefits rate of $27,000 per year in Social Security benefits.
Now, look at what kind of reliable returns you might generate from this portfolio. A good place to start is by looking at the bond market. Aaa corporate bonds currently pay an average interest of around 5%. If you put your entire portfolio into corporate bonds, this would generate about $78,500 per year of indefinite interest-based income. A $100,000 annual withdrawal rate, including drawing down on principal, could fund a retirement until around age 100.
This would give you a bond-based combined income of between $105,500 and $127,000 per year.
If you estimate a more aggressive strategy, which many financial advisors recommend, you could pursue a mixed-asset return of 8% annually. This might give you a portfolio income of around $130,000 per year until age 100, for a combined income of $157,000. As long as these numbers reach or exceed around 80% of your pre-retirement income, you should have a comfortable budget. If not, then you could consider where you can make spending cuts to meet your likely income.
Bottom Line
At age 60, it’s the appropriate time to start planning your retirement budget and withdrawal strategy. This means comparing what you have, your savings and benefits, against what it will likely cost to maintain your current standard of living.
Tips on Retirement Budgeting
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
- Retiring on more than $1 million is a very comfortable place to be, but what if you don’t have the kind of assets you need? Don’t panic. If you are approaching retirement age with little savings, you still can make a plan.
- 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.
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