What's a Realistic Retirement Budget? I'm 62 With $890k in a 401(k), $115k in a Roth IRA and I'm Eligible for Social Security.

During most of the decades you are preparing financially for retirement, you are likely focused on saving as close as you can get to the recommended amount, without worrying too much about the details. As you approach retirement, however, it’s a good idea to look more closely at what might be a realistic retirement budget. At age 62, with $890,000 in a 401(k) account, $115,000 in a Roth IRA and accounting for Social Security benefits, you can likely generate enough income to cover typical retiree lifestyle expenses. Your individual needs may vary, of course, but there are likely moves you can make now and in retirement to give you the flexibility you’ll need to fund a comfortable and secure retirement.

Consider speaking with a financial advisor for help building an effective retirement strategy.

Social Security Benefits

A typical retirement budget starts with the income side and Social Security benefits represent an important part of that for a large majority of retirees. Social Security is lifelong, guaranteed by the U.S. government and includes annual cost-of-living adjustments to keep up with inflation. The amount of your specific benefit is determined by your work history and age at claiming. Assuming your current income is $90,000 annually, here are estimates of your annual Social Security benefit based on your age when you start claiming benefits:

62 and 8 months in 2026: $1,679.00
67 in 2030: $2,444.00
70 in 2033: $3,166.00

Multiply these then by 12 to get annual amount:

$20,148
$29,328
$37,992

You will likely want to consider waiting to claim Social Security as long as possible so the benefits can increase. You may claim sooner for a variety of reasons, including lower lifespan expectation or disability that forces you to stop working. But for many people, delaying will produce a larger overall payout.

Investment Income

You will also be able to generate income from your investment portfolio. The age at which you plan to retire is an important consideration as well when it comes to how you’ll manage your nest egg. If you plan to stop working in the next year or two, you’ll likely pursue a conservative investment strategy designed to protect principal and perhaps generate income. If you expect to work until age 70, on the other hand, you may seek a more growth-oriented approach in order to help your savings grow.

A conservative strategy employing an asset allocation evenly balanced between stocks and fixed-income investments might generate a 5% annual return. A relatively aggressive growth strategy might put 70% of the portfolio in stocks and 30% in bonds which could in theory return 10% each year. This growth plan could more than double the current combined total of $1,005,000 in your 401(k) and Roth IRA to $2,154,307 in eight years.

If you retire immediately and start relying on your nest egg to cover your living expenses, you could use the 4% safe withdrawal guideline. This approach withdraws 4% of the principal to pay expenses and adjusts following withdrawals by the inflation rate.

Using it, you could take out 4% of $1,005,000 or $40,200 the first year of retirement. Assuming 2% inflation, you would withdraw $41,808 the following year and so on. Financial modeling suggests you have a high likelihood of being able to do this for at least 30 years without exhausting your account.

Combining the first-year withdrawal of $40,200 with the $20,148 from Social Security at age 62, you would have $60,348 to cover your bills the first year of retirement. This amount would adjust annually to reflect inflation, protecting your purchasing power.

If you wait until age 70 to retire, the safe withdrawal amount increases to $86,172. Together with $37,992 from Social Security, you’d have $124,164 each year, still carrying little risk from inflation or running out of money.

A financial advisor can help you make projections and weigh your investment and withdrawal options.

Retirement Expenses

The next question is whether this would be enough. Many planners estimate retiree living expenses at about 75% of your income the year before retirement. If you are making $90,000 now and retire next year, that suggests expenses would be about $67,500. Assuming this guideline is accurate for you, you might be able to retire immediately with a combination of Social Security and investments, although it might leave little cushion for the unexpected.

A more individualized way to estimate retirement expenses is to start with your actual current expenses and adjust for changes after you stop working. Add up current annual outlays for major expense categories including housing, transportation, healthcare, food and utilities.

Some retirement expenses will be lower than they are now. Retirement account contributions and work-related expenses such as commuting costs will likely end entirely, for example. However, you may spend more for travel and healthcare. For instance, if you retire before reaching Medicare eligibility at 65, you’ll have to budget for private health insurance.

Taxes are generally a smaller issue after retirement, because Social Security income is at least partially sheltered from taxation and investment income is not subject to FICA payroll taxes. If it appears you may be in a higher tax bracket after retirement, you may want to consider transferring all or part of your 401(k) to the Roth account, since 401(k) withdrawals will be taxed as ordinary income. A Roth conversion involves paying taxes now at your current normal income rate on any funds you transfer, but withdrawals later are tax-free.

Consider using this free tool to match with a financial advisor who can help you integrate the various elements of your retirement plan.

Bottom Line

With $890,000 in a 401(k), $115,000 in a Roth IRA and Social Security as an income source, some 62-year-olds may have enough saved to consider retiring. However, whether this works for you depends on factors such as your current income, your Social Security earnings record and the lifestyle you plan to maintain in retirement. Another important variable is timing, since waiting to retire can increase your Social Security benefit and give your savings more time to grow.

Before deciding whether retirement at 62 is realistic, it helps to estimate what your ongoing expenses might look like and how they compare with your expected income. This step can clarify whether your savings and benefits are likely to support the type of retirement you have in mind.

“Estimating retirement expenses starts with your lifestyle — where do you want to live and how do you want to spend your days? If you plan to move, research local housing, food and entertainment costs to nail down what you might spend in a typical year. If you’re considering retiring before age 65, you should also consider local health care costs since you won’t yet be eligible for Medicare. Even after signing up for Medicare, some health costs will come out of your pocket (or your Social Security check), so consider those, too,” says Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

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