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There are two main parts to a retirement budget: income and expenses. Income can come from many sources, including Social Security or pension payments, annuity payments, interest on investments, and retirement account withdrawals. Expenses are the money you spend these funds on, such as housing, transportation, utilities, food, and health care. Because budgeting involves forecasting, accuracy can be difficult. As a result, retirement budgeters often rely on rules of thumb such as a 4% safe withdrawal rate and budgeting for 80% of pre-retirement income. A lot depends on the details, but with 1.1 million With $2,800 in tax-deferred retirement accounts and an expectation of $2,800 in Social Security benefits, you can probably retire comfortably and financially secure. And a step-by-step process can help you create useful estimates.
A financial advisor can also help with retirement budgeting.
Here’s a quick way to build your retirement budget.
Your retirement lifestyle expectations play an important role in determining your retirement budget. Now is the time to think about your plans for how to use the extra time after you stop working and the potential financial impact of those plans.
For example, will you spend more time with your family? Are they nearby or will visits involve expensive long-distance travel? Do you have any hobbies and if so what? Obviously, the hobby of sailing will affect your budget more than attending local square dances. How much will you travel and where? A camping trip to local historical sites will be more affordable than a first-class tour of European capitals. And so on. Planning how you spend your time will factor into your budgeting process.
The 80% guideline is a quick way to estimate your expected retirement expenses. To use it, multiply your last year’s salary by 80%. On average, the result will be similar to the amount you will spend in retirement. For example, if you earned $100,000 last year, you’ll probably need about $80,000 in retirement to pay your bills.
Over time, research into retiree finances has shown that these guidelines reflect the experiences of many retirees. However, the actual percentage may vary from 55% to 90%. Your experience may also vary slightly depending on your lifestyle and needs. But this exercise will probably get you closer.
Another way to estimate retirement expenses is to look at your current expenses and subtract those you don’t expect to have in retirement. Chief among these are work-related expenses such as travel to and from work, clothing and meals outside the home. Also, it’s natural that retirement savings usually stop when you retire. You’re also likely to spend less on education and taxes, even though your health care costs tend to increase.
When it comes to income, Social Security is an important part of financing retirement for many retirees. Your $2,800 monthly payment will increase annually with cost-of-living adjustments linked to inflation, protecting the purchasing power of your dollars. Social Security benefits last a lifetime and can support survivors when you’re gone.
The 4% guideline is often used in retirement planning to determine a safe amount you can withdraw from your retirement savings each year. To use it, multiply your account balance by 4%. For example, 1.1 million $ in a combined IRA and 401(k) account would allow for a safe withdrawal of $44,000 in the first year. In subsequent years, the amount increases at the rate of inflation. If inflation were 3% in the first year, you would withdraw $45,320 in the second year, and so on. Computer models show a very high probability that using this approach, a conservatively invested portfolio evenly balanced between stocks and bonds will last at least 30 years without running out of savings. A financial advisor can help you create a portfolio with longevity and asset allocation that will help you achieve this goal.
Instead of investing in the market, you can buy an annuity. Annuities provide guaranteed annual income regardless of market fluctuations. There are many types of annuities, but a simple annuity can give you an annual payment equal to 7% of the purchase amount. In this example, 1.1 million A $ annuity would be $77,000. Although more than a safe exit from an investment portfolio, annuities typically do not include cost-of-living adjustments. Perhaps more importantly, annuity payments cannot continue after your death, leaving survivors to fend for themselves.
Retirees often combine these income methods with others, such as investing in dividend-paying stocks, to create an income stream that provides flexibility to adapt to changing conditions. The amount and reliability of the income received can vary greatly. Assuming you maintain a conservative investing style, you could likely have a total retirement income of $77,600, including $33,600 from Social Security and $44,000 from investments.
Good budgeting is often more complicated than this simple example. Here are some other things to consider:
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Life expectancy. How long you will live may be the most important consideration in retirement planning. After all, about 1 in 6 American men don’t live to age 65, and if you die before you retire, the whole exercise is moot. The number of years you will spend in retirement also depends on how much savings you need. Social Security estimates that the typical 65-year-old will live another 18 years. Women can expect another 21 years.
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Taxes. Most retirees pay less income tax when they stop working, but there are tax-minimizing strategies that can make taxes even less of an issue. For example, while annuity payments and withdrawals from tax-deferred accounts like IRAs and 401(k)s are taxable, you can lower your taxable income by saving in a Roth IRA, which allows for tax-free withdrawals. You may be able to convert your IRA and 401(k) funds to a Roth.
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Inflation. Rising prices reduce the purchasing power of your income in retirement. Social Security premiums rise to account for this, and you can also cushion the impact of inflation by increasing withdrawals from retirement accounts within the 4% guideline.
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Required Minimum Distributions (RMDs). When you turn 73, you’ll need to start withdrawing from your tax-deferred retirement account on a schedule set by the IRS. Most retirees already withdraw more than the RMD amount, so this is not a problem for them. However, if you want to avoid RMDs, you can do so by saving in a Roth account that does not have RMD rules.
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Long-term care. Many retirees eventually need some form of long-term care. Depending on the type and length of care, this could be a small amount or more than you can easily afford. You can also consider long-term care insurance to avoid this risk.
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Delayed retirement. Working longer is one of the most powerful ways to improve your retirement finances. Your Social Security benefit will increase by about 8% each year you wait to claim it until you turn 70. Similarly, the longer you let your retirement accounts go tax-free before you start withdrawing, the larger your safe withdrawal amount will be. Consider consulting a financial advisor to evaluate your options.
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Overview. Pull out your retirement budget regularly and see where it needs to be updated or adjusted. Fluctuations in inflation, investment returns, health care costs, and other factors may mean you need to change the way you spend or generate income.
With 1.1 million With $2,800 in tax-deferred retirement savings accounts and $2,800 in Social Security, you can expect $77,000 in income in the first year if you retire immediately. By using the 4% withdrawal guideline and relying on Social Security’s cost-of-living adjustments, you’ll be protected from inflation and likely to run out of money in your lifetime. Whether this will be enough to cover your expenses depends on your lifestyle expectations.
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Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool will match you with up to three financial advisors in your area, and you can survey your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Where you retire can be one of the most important factors in determining how financially comfortable you will be. Use SmartAsset’s cost of living calculator to see the sometimes surprising cost differences between cities.
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Have an emergency fund in case of unexpected expenses. An emergency fund should be liquid, in an account that is not exposed to significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. However, a high-interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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Record Man 65 with 1.1 million. $ in my 401(k) and IRA and $2,800 in my Social Security check. What is my retirement budget? appeared first on SmartAsset SmartReads.
