We’re 66 With $1.4 Million in IRAs, and $4,100 Monthly From Social Security. What’s Our Retirement Budget?

Say that, as a married couple, you have $1.4 million in your IRAs and, at age 66, expect about $4,100 per month in Social Security. Based on some typical rules of thumb, you might be able to plan on about $108,000 per year of retirement income, but how much you actually need and will be able to take will depend on your specific circumstances. 

Frequent commenter to this section Kevin Caldwell, Principal with the wealth management firm Golden Road Advisors, refers to retirement planning as an approach in “buckets.” As you prepare for retirement, it’s good to think about your budget in terms of specific parts of life. One way to organize this is:

• Needs
• Lifestyle
• Aspiration
• Estate

Your needs bucket is the money that, at a bare minimum, you need to survive. What is the income that must come in the door each month in order to keep the food warm and the bills paid?

Your lifestyle bucket is the money that, realistically, you want in order to live the life you enjoy. This is not money for big, new things. Rather, it’s the money to keep going out to your favorite restaurants and taking your regular trips. 

Your aspiration bucket is the money that, ideally, lets you add to or expand your lifestyle. This is the money for a new boat, that round-the-world-trip, or retiring at 60. It’s for those big swings.

Finally, your estate bucket is the money for anything you intend to leave behind. Whether there are people who will need you, or just something you care about, this is how you plan for it.

If your retirement income won’t meet the needs bucket, then you simply can’t afford to retire, not yet. You will lose the house. If it meets only the needs bucket, then you can technically afford to retire, but you should wait if at all possible. 

If your retirement income meets your lifestyle bucket, then you should generally be fine. You can probably retire comfortably, provided you’ve got proper risk management in place, including long-term care insurance. The same is true if your retirement income meets the aspirational bucket, in which case good for you. 

And the wild card is your estate bucket. This depends on your individual circumstances. Some retirees have dependents or obligations, reasons that they must leave a minimum estate. Others simply would like to leave something for their loved ones. This is situational. 

Then, you have to match your budget with your income.

Your retirement income will come from your combined benefits, pensions and assets. For most households, this generally means retirement accounts and Social Security. In our example here, let’s say you are a married couple with $1.4 million in your IRAs. You’re 66 and can currently collect $4,100 in Social Security benefits. 

Let’s start with Social Security. At 66, you would collect 93.3% of your full benefits. If you wait until age 67, you can increase your annual Social Security income to $52,733 per year. Since this increase will last for the rest of your life, it’s likely worth waiting if you can. (If you wait until age 70 to collect Social Security, you can increase your lifetime benefits further, to $65,388 per year.)

Then there are your IRAs. There are several ways to think about portfolio income. The standard option is the 4% rule. Under this logic, you assume a combination of secure investments and inflation-adjusted withdrawals leading to 4% withdrawals over 25 years. Starting with $1.4 million, that would give you about $56,000 per year.

This gives us our number up top. Combined, your full Social Security benefits and a 4% IRA withdrawal rate would come to about $108,733 of inflation-adjusted income per year. 

That said, there are many ways to think about portfolio income. For example, you could use this portfolio to purchase a lifetime annuity. That annuity might generate about $112,584 per year ($9,382 per month). This is significantly more at the outset than a 4% plan, giving you a combined income of $161,784, but on the other hand it will not increase with inflation. Or you could invest for more aggressive returns, levying more equities into your portfolio for a growth rate closer to 8% than 4%. This might give you significantly more income over time, but at the cost of significantly more volatility as well.

It all depends on your personal situation and capacity for risk. 

Finally, there are your withdrawal needs. 

First, make sure to keep an eye on your RMDs. This is the minimum amount you must take from your portfolio every year starting at age 73. For example, take that 4% burn rate. At age 73 you would have about $1.12 million left in your IRAs, triggering a $42,264 RMD. Given that your planned income is likely higher than this the RMD rule will probably not be an issue, but it’s important to remember.

Then there are taxes. You will pay full income taxes on all earnings withdrawn from an IRA just like with ordinary income. Here, you will also pay income taxes on 85% of your Social Security benefits because your AGI will be relatively high.

A financial advisor can help you determine an effective tax strategy for your retirement accounts.

Finally, make sure to prepare for the specific needs that retirement brings. When you retire, several different structures change in your life. On the one hand, you can expect your income needs to drop. Most households spend less in retirement, and not having to dedicate money to retirement savings will free up a significant portion of your budget (between 5% and 10% for most households). On the other hand, you will have new expenses. Among other issues, you will need gap insurance (to cover needs Medicare doesn’t cover) and long-term care insurance (in case you or your spouse have residential needs in the future). When you run the math on your needs and lifestyle spending, make sure to account for costs like this. 

Finally, don’t forget inflation, especially if you rent your home or live in a high-cost urban area. Even at the Federal Reserve’s 2% benchmark, prices tend to double roughly every 30 years. Social Security is benchmarked to this, and many income strategies are too, but it’s important to keep an eye on. 

With a $1.4 million IRA and about $4,100 per month in Social Security at age 66, you might expect a retirement income of around $108,000 per year. What your actual retirement budget is, though, that depends entirely on your lifestyle and needs.

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