Ensuring that your retirement savings last the rest of your life often requires balancing income with expenses over your projected lifespan. But suppose you have $900,000 in an IRA. You’d also want to consider whether you want to leave behind a financial legacy. And since all long-range forecasts are subject to change, you’d need to manage risk, potentially using insurance policies and portfolio diversification.
Here’s a look at how a 75-year-old with nearly $1 million in savings could approach income and expense planning for the rest of their life. Whether you’re a DIY retirement planner or need someone to walk you through every step of the process, a financial advisor can provide valuable insight.
Income, Expenses and Longevity
Your nest egg will likely last the rest of your life if the amount of money you are spending doesn’t outpace the amount of income your portfolio generates. With that in mind, figuring out how to stretch a specific amount of money over an indefinite amount of time mainly hinges on coming up with realistic projections of your expenses and your income while also accounting for circumstances that are hard to foresee.
One key bit of information that is especially hard to foresee is how long a retiree is likely to live. The Social Security Administration’s life expectancy calculator indicates a man who’s 75 today can expect to live to age 87, while a woman who’s the same age can expect to live almost to 89. Of course, your individual life expectancy can vary depending on whether you smoke, exercise, maintain a healthy weight or have existing medical conditions, among other factors.
The task of calculating whether your savings will last is further complicated by the possibility of unexpected events that can range from extended market booms or busts to the need for costly long-term care. However, if you use conservative projections and build in a cushion, you can potentially create a workable budget that will allow you to live in comfort the rest of your life without exhausting your savings. But if you need help building a retirement income plan and/or budget, consider connecting with a financial advisor.
Forecasting Income
To start with retirement income, as a shortcut you can use the 4% rule to estimate a safe withdrawal rate. This guideline suggests withdrawing 4% of your portfolio in your first year of retirement and then adjusting your subsequent withdrawals for inflation each year can make your savings last 30 years.
But the 4% rule is not one-size-fits-all, however. It is quite conservative, and the $36,000 withdrawal from a $900,000 IRA may not be enough to meet a 75-year-old retiree’s needs. As a static approach, it also doesn’t account for how a retiree’s expenses and spending needs may change.
For a little more income and a lot more safety, the retiree could put all $900,000 into 30-year U.S. Treasury Bonds, currently paying 4.25%. That would generate $38,250 per year in interest until they turn 105, without ever touching the principal. On the downside, bond yields may lag behind inflation, ultimately reducing purchasing power.
At the other end of the risk-reward spectrum, stocks promise higher yields but with more risk. The S&P 500 Index, for instance, has returned nearly 10% a year on average for decades. However, you likely can’t count on $90,000 annually from a stock market investment due to market fluctuations, fees and other influences that reduce actual returns over time. Investing entirely in stocks also can expose a retiree to an excessive level of risk and volatility.
Other assets to consider for a retirement portfolio may include annuities, dividend stocks, tax-free and corporate bonds and alternative investments such as real estate. These offer varying degrees of risk and reward. Blending them to create a diversified portfolio can produce more consistent and reliable returns over the long haul.
Suppose the retiree built a diversified portfolio that averaged a 7% annual rate of return. If they withdrew 7% of their portfolio at age 75, that would give them $63,000 before taxes. They could then adjust their withdrawals for inflation (between 2% and 3%) each year after that. While their savings likely won’t last 30 years given the higher withdrawal rate, it probably doesn’t need to, considering their current age and life expectancy.
In addition, most retirees can expect Social Security benefits. Depending on your earnings record and when you claim benefits, you can collect up to $58,476 in 2024. However, that’s the maximum payment. A February 2024 Social Security Administration report showed that Old Age and Survivors Insurance benefits paid to retired workers averaged $1,910 monthly or $22,920 per year.
If we add the average Social Security benefit of $22,920 to the $63,000 in portfolio withdrawals, it produces a hypothetical retirement income of nearly $86,000 at age 75. While this is a rough estimate using a hypothetical scenario, a financial advisor can help you more accurately calculate what your retirement income could be based on your income sources and Social Security earnings history.
Estimating Expenses
Just like retirement income, spending can vary wildly. But averages can also be useful here. In 2023, the Employee Benefit Retirement Institute reported on a 2022 survey of retiree spending. It found that retirees’ categories of expenses broke down as follows:
| Expense Category | Percentage |
|---|---|
| Housing | 30% |
| Food | 26% |
| Transportation | 11% |
| Entertainment | 8% |
| Health insurance | 8% |
| Other expenses | 6% |
| Clothing | 6% |
| Out-of-pocket medical costs | 5% |
Keep in mind that this budget split doesn’t include any outlay for taxes. While many retirees pay less in income taxes than they did when they were working, taxes play an important part in retirement income planning.
Remember, up to 85% of your Social Security benefits are taxable depending on how much “combined income” you have. You can calculate this figure by dividing your benefit in half and adding it to your adjusted gross income (AGI) plus any tax-exempt interest income you may have. If your combined income as an individual exceeds $25,000 ($32,000 if married and filing jointly), you’ll pay taxes on up to 50% of your benefits. If it’s more than $34,000 ($44,000 if married and filing jointly), up to 85% will be taxable.
Meanwhile, withdrawals from your IRA will be subject to income tax rates. Luckily, some financial advisors can help you account for taxes in your retirement plan.
Managing Risk
Any practical long-range forecast considers risk. You can manage portfolio risk by diversifying among different asset classes. Insurance provides another way to protect assets and shield against unexpected expenses. Here are major types of insurance to consider:
- Homeowners
- Automobile
- Health
- Liability
- Long-term care
Some coverages may not be relevant or necessary. For instance, a 75-year-old is likely to have Medicare and may not need private health insurance, although they can choose to pay for supplemental coverage. Likewise, if they rent their home, they won’t need homeowner’s coverage and a less costly renter’s insurance policy might be sufficient. Whether you’re retired or in your prime earning years, a financial advisor can help integrate insurance and other risk mitigation strategies into a comprehensive financial plan.
Bottom Line
In theory, it’s entirely possible for a 75-year-old to stretch $900,000 in savings for the rest of their life. Whether it will be enough for you depends on a number of factors including your expenses in retirement and your appetite for risk as an investor. You may be able to reduce expenses by moving to a less costly location or boost your investment earnings by carefully diversifying your portfolio. You also may want to consider protecting your assets and income against losses with appropriate insurance and risk management strategies.
Retirement Planning Tips
- Ask a financial advisor for insight into how you can make your retirement savings last. 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.
- SmartAsset’s retirement calculator can not only help you estimate how much money you’ll need to have to support your projected spending in retirement, it can project whether you’re on track to meet that savings target.
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