What’s a Realistic Retirement Budget? I’m 48 With $430k Saved, Making $95,000 Annually

What’s a Realistic Retirement Budget? I’m 48 With $430k Saved, Making $95,000 Annually

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When it comes to estimating your retirement income, a common rule of thumb is that you’ll typically need about 80% of your work income to maintain the same standard of living. This comes from a number of factors, including the fact that you won’t need to set aside money for retirement anymore.

This number is certainly flexible and will vary from family to family. If you’re currently living well below your means, for example, you can probably comfortably afford less. If you’re living paycheck to paycheck, you may want to plan for either more income or fewer expenses. But 80% is a good place to start.

For example, let’s say you’re 48 years old and currently make $95,000 per year. With $430,000 in a 401(k), what type of retirement budget should you plan?

Here’s how to think about it. You can also consider using This free tool To align with a financial advisor to discuss the details of your situation and how to plan accordingly.

Typically, we start with your money and build a budget from there. But this time, let’s start with your spending. Here, she makes $95,000 a year. So, with our rough estimate, we’ll start by assuming that you’ll need about $76,000 per year/$6,350 per month to maintain your current standard of living ($95,000 * 0.8).

The math doesn’t end there though.

Here, we have a few key moving pieces. First, at age 48, you may have many expenses that you shouldn’t expect in retirement. Notably, spending or saving priorities related to dependents are likely to decline in retirement. For example, spending on your kids or saving for college is a large portion of your budget that you probably won’t need in retirement.

On the other hand, you have approximately 20 years before full retirement age. It’s a long time, with plenty of room for your income and lifestyle to grow. This makes predicting your future needs more difficult, because it is entirely possible that your standard of living will depend on more than $95,000 per year by the time you turn 67.

In general, do your best to anticipate the expected changes in your life and needs. Beyond that, we can start by planning to maintain your current standard of living at your current income level.

Next, remember the long-term costs associated with retirement. Notably, your budget should always anticipate taxes and inflation.

When you collect income from a pre-tax retirement account, you’ll pay income taxes on the full value. The same way you currently live on nothing more than a dollar74,571 After taxes, taking $76,000 a year from a retirement account would actually generate $76,00061,205 In annual disposable income. Thanks to RMDs (required minimum distributions), you can’t avoid these taxes indefinitely even if you have other sources of income.

However, how you keep this money will affect your taxes. Money held in a pre-tax account, such as a 401(k) or traditional IRA, will be subject to full income taxes in retirement. Money held in a Roth IRA or Roth 401(k) will be subject to taxes immediately, but nothing at all in retirement. Money held in a taxable portfolio will be subject to either capital gains taxes or income taxes based on the nature of the assets.

At age 48, a Roth conversion may be a good way to save money in the long term. You have enough time remaining before retirement that the long-term untaxed growth of the portfolio can outweigh the initial transfer taxes (perhaps by a lot). The challenge will be liquidity. If you do a one-year conversion plan, you will owe it least $128,047 in transfer taxes. Since you’re under age 59.5, you can’t take that money from your 401(k), so you’ll need to find it somewhere else.

No matter how you structure it, that money will also become less valuable over time as inflation gradually pushes prices higher. In general, you should plan to increase your portfolio withdrawals by about 2% each year to keep up with inflation, and your retirement plan should take that into account.

Talk to a financial advisor To help build and implement a retirement strategy based on your goals and circumstances. They can help you anticipate your needs in different circumstances, taking into account taxes, inflation and other factors.

Once you have a sense of your potential future needs, the question is how to align with your potential future income. Start by estimating your Social Security benefits.

You have enough working years remaining that this is still a rough estimate. Your future earnings will affect your Social Security balances, and may increase your benefits significantly if your earnings increase. However, based on your current earnings, we can start by assuming that you will collect around $40,897 per year / $3,408 per month in 2025 dollars.

This is your estimate at full retirement age (currently 67). If you wait until age 70, you can increase that to $50,712 per year / $4,226 per month. Again, these are basic numbers. In future years, the more you earn, the more you will be able to increase your future Social Security benefits up to the program’s benefits maximum Taxable income ($168,600 in 2024).

After estimating Social Security, we need to estimate your potential future portfolio income. Here, we start with $430,000 in your 401(k) at age 48. This is great news because, even with a conservative portfolio strategy, you are currently in a strong position heading into retirement.

For example, let’s say you invest entirely in corporate bonds that pay a bond market average annual yield of 5%. If you continue making 10% annual contributions and retire at age 67, you may have about $1,0002.36 million In your portfolio when you retire. Even with a conservative 4% withdrawal strategy, this would generate $94,400 per year in portfolio income, for a combined income of $135,297 per year including Social Security.

On the other hand, you can choose a more aggressive strategy. Many financial professionals are calling for greater investor focus Stocks During most of their earning years. So, let’s say here that you invest in a mixed-asset portfolio that combines bonds and stocks to get an annual return of 8%. If you are He continues To make annual contributions of 10%, in 29 years, this portfolio would be worth nearly $5 million.

With a 4% withdrawal strategy, this would generate about $199,600 per year in portfolio income versus $240,497 per year in combined income in retirement. This is more representative of your likely situation in retirement than a pure bond portfolio, where you should invest for more growth while you work. While this may seem like a lot more than you need, consider the fact that an inflation rate of 2.5% over twenty years would make an income of $240,000 actually equal about $146,000 in today’s dollars.

This gives us two basic answers to our main question. First, your realistic retirement budget for your profile is $76,000 per year in today’s dollars. Based on your current income, this is likely the number that will allow you to maintain your current standard of living in retirement (adjusted annually for inflation). Second, your realistic retirement budget for your profile is also about $240,000 per year, or $146,000 in today’s dollars. Based on your current income, portfolio, and reasonable growth expectations, this is the income your portfolio can realistically generate.

You are in a very strong position with this income and portfolio. Enjoy, and consider consulting A Financial advisor For personal advice.

There are two answers to a realistic retirement budget. First, the rule of thumb is that you will need about 80% of your current income to maintain your standard of living in retirement. Second, by estimating Social Security benefits and potential portfolio returns, you can predict what your portfolio will earn over the long term. After that, you just have to make sure that the two numbers meet.

  • Is this 80% number really correct? It’s a very useful rule, and often true for many families. However, let’s be sure to take a look at how and why your spending might decline in retirement… just in case it doesn’t.

  • Finding a financial advisor is not difficult. Free SmartAsset tool Matches you with vetted financial advisors serving your area, and you can make a free introductory call with your matched advisors to determine which advisor you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.

  • Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations such as the stock market. The trade-off 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.

  • Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Image source: ©iStock.com/Yaroslav Olieinikov

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