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 individual lifestyle choices or other needs call for more income, various strategies might be able to provide it. If you're modeling various retirement financial scenarios, consider talking it over with a financial advisor.
One common rule of thumb suggests withdrawing 4% of the principal from a retirement account in the first year of retirement, adjusting that amount annually by the rate of inflation. For a $1.6 million IRA, that figure would be $64,000 in the first year. The next year, assuming a 2% inflation rate, the withdrawal would be $65,280 and so on. Barring the unexpected, a retiree with a conservatively invested portfolio could continue doing that for 30 years with little chance of exhausting their savings.
A $2,800 monthly Social Security benefit is equivalent to $33,600 annually. Along with the $64,000 IRA withdrawal, a retiree in this situation could likely expect a total of $97,600 the first year of retirement. Social Security is also adjusted for cost of living, so the retiree's income, which comes to $8,133.33 monthly, would likely stay approximately the same in terms of purchasing power. Still, you’ll have to make sure this covers your expenses — including taxes.
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.