Age 65 is a major transition for many individuals as they shift to thinking about retirement and begin to contemplate benefits like Social Security and Medicare. Retirement planning means you’ll have to consider taxes, healthcare, your retirement budget and more. With $1.5 million in an IRA and two Social Security payments to rely on, a married couple should have some flexibility for retirement, but their individual circumstances and how they strategize can make a big difference in their quality of life. Here’s how to think about it.
If you need help planning and saving for retirement, consider working with a financial advisor.
If you’re approaching retirement, the first area to examine is your expected savings, income and planned retirement date. Basically, how much money will you have and when? Your income, both from your portfolio and your benefits, will depend heavily on when you choose to retire.
For example, let’s say you’re currently 65, have started collecting Social Security and your IRA is invested in a mixed-asset portfolio with an 8% annual rate of return. If you retire at 67 (full retirement age) and don’t plan to continue contributing to your account, here’s what your finances could look like at retirement:
On the other hand, say that you wait until age 70 to retire and claim your Social Security. Again, take an 8% average return on a mixed-asset portfolio and discount additional contributions. By retirement you might have:
By delaying Social Security until age 70, you and your spouse’s benefits increase to more than $5,200 per month, increasing your annual budget by nearly $13,000.
For the purposes of this article, we’ll assume that you retire at 67. The point here is that delaying retirement can help you increase your retirement budget in many cases. And if you need help determining a suitable time to retire, connect with a financial advisor and talk it over.
A retiree adds up her and her husband’s monthly expenses.
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Once you know how much income you can expect to generate each year, the next step is to make a budget for it.
“When determining a retirement budget, the goal isn’t just to ensure your money lasts, but to ensure it lasts in a way that maintains your quality of life,” said Aaron Cirksena, CEO and Founder of MDRN Capital. “With $1.5 million in an IRA and a steady stream of Social Security benefits, it’s about balancing the financial priorities with personal priorities. You calculate based on expected needs and foreseeable expenses, but also on the less tangible aspects — like aspirations, goals, dreams and the peace of mind.”
Your income will depend on a variety of factors, including how you invest and manage your money, including your withdrawals. A commonly applied rule of thumb is withdrawing 4% of your portfolio in your first year of retirement and then increasing subsequent withdrawals by the annual rate of inflation. This increases the likelihood that your savings last through retirement.
In this simplistic example, your income in the first year might be:
For individuals with a lower risk tolerance who might not want to actively manage their money, an annuity might be an option. Alternatively, you can adjust your withdrawal rate up or down depending on your needs and portfolio performance over time.
Keep in mind that a retirement planner can help you calculate how much you can afford to withdraw from savings each year.
From there, as Cirksena says, it’s about balancing your spending and lifestyle.
For example, how much do you spend each month on housing? How much will you spend on food? How much are your other recurring monthly bills? How much money will you need to allocate for long-term care and gap insurance?
And account for the local cost of living, keeping in mind that expenses and rents in high-cost urban areas tend to inflate much faster than the national average.
Then, consider your lifestyle and the discretionary spending that comes with it. What kind of hobbies and habits do you enjoy? For example, do you want to travel in retirement? Do you enjoy eating out or attending live shows? Do you like to buy new clothes?
Combined, this will tell you the spending side of your retirement budget. But if you need guidance as begin to build your spending plan for retirement, consider connecting with a financial advisor.
A couple who’s approaching retirement calculates their RMDs and how much they’ll owe in taxes on their retirement income.
You’ll need to pay income taxes on withdrawals from a traditional IRA. Your tax rate will depend on your adjusted gross income (AGI), as it does preretirement. Your AGI will include your IRA withdrawals, some of your Social Security income, as well as income from other taxable sources. With $120,400 in total income between you and your spouse, you would likely pay income taxes on 85% of your Social Security benefits.
RMDs will also dictate how much of money you’ll need to withdraw from your IRA. For example, say that you still have your entire $1.75 million in your IRA at age 73 (the age at which RMDs begin). You would need to withdraw at least $66,037 to avoid tax penalties for not taking the proper RMD. While this would be less than you would withdraw if you followed the 4% rule, knowing how much you’re required to withdraw is nonetheless important.
One popular retirement tax strategy for people with IRAs is to use a Roth conversion to settle up your taxes with the federal government now rather than in retirement – this will also help you eliminate RMDs. However, you’ll owe taxes upfront on Roth conversions and won’t be able to use the converted money for five years after making the switch.
Consider speaking with a financial advisor to plan for retirement taxes and RMDs.
Your retirement budget is based on two main factors: your assets and your spending. To create a sustainable budget, you’ll need to make sure those numbers meet in the middle. Start by assessing your assets and determining how much income then can generate. Then, examine your spending needs. If those numbers don’t match, you need to make some changes.
Managing your money in retirement is critical. Ideally, this phase of your life will be almost as long as your working years, so keeping your money invested and growing is generally very important. But you need to balance that with the need to keep your money safe, since you can’t easily go back to work and earn more of it. Here’s how to start thinking about that balance.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. 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.
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