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A budget by definition includes both income and expenses. The two halves of a budget are interdependent, so that if expenses go up, income must also rise. Otherwise, the budget won’t balance. Someone ready to retire at 62 with $1.6 million in an IRA and $2,800 in monthly Social Security benefits could start with an income estimate of approximately $97,600, based on a popular retirement fund withdrawal rate. This would be enough to fund a comfortable retirement in many cases, based on surveys of retiree spending.
If you’re modeling various retirement financial scenarios, consider talking it over with a financial advisor.
Income Budget
Your $2,800 monthly Social Security benefit provides a strong foundation for retirement income. On an annual basis, that equals $33,600 before taxes. Because Social Security is adjusted for inflation and continues for life, it can serve as the baseline for covering essential expenses such as housing, utilities and groceries.
With $1.6 million in an IRA at age 62, a common starting point is a 3% to 4% withdrawal rate. That could translate to roughly $48,000 to $64,000 per year, though retiring in your early 60s may call for leaning toward the more conservative end of that range. Combined with Social Security, this could produce approximately $81,600 to $97,600 in gross annual income.
Withdrawals from a traditional IRA are generally taxed as ordinary income, and a portion of your Social Security may also be taxable depending on your total income. After federal and possible state taxes, your spendable income will likely be lower than your gross total. Building taxes into your income budget helps prevent overestimating what you can comfortably spend.
Once you’ve estimated your after-tax income, divide your budget into fixed expenses and flexible spending. Fixed costs might include housing, insurance, healthcare and basic living expenses. Discretionary categories, such as travel, hobbies and dining out, can be adjusted if markets decline or unexpected costs arise.
Your income budget should not be static. Market returns, inflation and personal circumstances can change over time. Periodically reviewing your withdrawal rate and spending patterns, ideally with a financial advisor, can help ensure your $1.6 million portfolio and Social Security benefit continue to support a sustainable retirement lifestyle.
Expense Budget
There are a few different methods of estimating expenses in retirement. One is to estimate expenses as a percentage of retiree earnings the last year of working. The percentage used ranges from 55% to 90%, with lower-income retirees typically employing a higher percentage.
A figure of 70% is one of the more widely used. Average salary for someone 55-64 in 2023 was $63,544, according to the Bureau of Labor Statistics. For an average 62-year-old retiree, then, using this approach suggests annual expenses of $63,544 times 70% or $44,480.80, well below the estimated annual retirement income of $97,600.
Another way to estimate expenses is to look at what retirees actually spend. According to surveys, median retiree budgets range from about $24,000 annually to about $34,000 annually. Average retiree budgets are significantly higher, most likely because averages can be skewed by a smaller number of bigger spenders. However, examinations of actual retiree spending again suggest that $97,600 annually could readily fund a comfortable retirement.
A more personalized approach is to estimate expenses based on individual retiree spending habits. To do this, a financial planner can gather data on current spending and then modify these figures based on likely needs after retirement. Modifications usually involve reducing the expenses. For instance, saving for retirement is likely to be a significant expense before retiring that will end upon retirement. Income taxes may also be lower. Retirees don’t owe FICA taxes on withdrawals or investment earnings, and at least a portion of Social Security benefits are also income tax-free.
However, some expenses, such as healthcare, are likely to increase in retirement. For one thing, Medicare eligibility does not begin until age 65, so someone who retires at 62 will have to pay premiums for private healthcare insurance for three years. You’ll also have to make sure your withdrawals suffice for required minimum distribution (RMD) requirements in a pre-tax account like your IRA.
Retirement Budget Options
If a retiree’s income and expenses don’t match, there are a number of ways to manage this. One of the most effective is to delay retirement. A 62-year-old is eligible for reduced Social Security benefits. However, claiming benefits at 62 reduces the amount paid by 30% compared to waiting until full retirement age at 67.
Waiting five years will also allow the IRA balance to increase. At average annual earnings of 7%, $1.6 million grows to $2,244,083 in five years. Using the 4% withdrawal rate, this would increase annual withdrawals from $64,000 to $89,763 (not inflation-adjusted).
There also options for reducing expenses. Housing is both the largest and most variable expense for most retirees, consuming approximately a third of the typical retiree’s income. Downsizing to a smaller home or moving to a lower-cost area of the country can significantly reduce this major expense and help a retirement budget balance. And if you need help making more detailed calculations for your own situation, you can use this free tool to match with a financial advisor.
Bottom Line
With $1.6 million in an IRA and $2,800 per month in Social Security, you have a solid foundation for retirement at 62. Depending on your withdrawal rate and tax situation, your total annual income could comfortably support a moderate to upper-middle retirement lifestyle. The key is building a realistic budget that accounts for taxes, healthcare and long-term sustainability.
Retirement Tips
- A financial advisor can help you prepare a retirement budget. 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.
- SmartAsset’s Investment Return and Growth Calculator can help you estimate how your portfolio will grow over time.
- 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.
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