At its most basic, creating a retirement budget is all about money in vs. money out.
You figure out what kind of income you can reliably generate from your combined assets, then compare it against your household spending. If income surpasses spending, you’re set. If not, you need to make some adjustments.
Need help creating a comprehensive financial plan for retirement? Speak with a fiduciary financial advisor today.
But packed inside that simplicity are countless moving parts. Managing your income involves investment, risk analysis, longevity issues and much more. Managing your spending involves assumptions about housing, insurance, lifestyle, inflation and (again) much more.
To see how this works, let’s imagine a hypothetical couple at age 60. They have a combined $1.3 million in their 401(k)s and can expect $5,100 per month in combined Social Security. This lends itself to a generous income, so spending is less likely to be a problem with even moderately comfortable lifestyle spending.
So, here are some of the factors that will influence the income side of their budget.
From an income standpoint, our hypothetical couple is doing quite well.
At $2,550 per person, their eventual monthly Social Security benefits will be well above the average retirement benefit of $1,976 per month as of January 2025.
So this household will start with a guaranteed $61,200 per year from benefits alone when they retire. But the real assets are this couple’s 401(k)s. Here, we have two people with $1.3 million across their 401(k) plans. They’re also only 60 years old. Assuming they wait until full retirement age to collect their benefits and retire, that gives their 401(k)s seven more years of investment and growth.
Of course, how much they’ll have in their 401(k)s at the end of those seven years will depend on their investment strategy and market performance. However, here’s a look at how much money they could potentially have if their portfolio grew by rough historical averages:
Even using conservative assumptions, our couple could potentially have a significant nest egg by the time they retire in seven years.
For example, take the 8% middle ground approach with a potential $2.2 million by retirement. A 4% annual withdrawal rate would generate $88,000 of pre-tax income per year. With their Social Security benefits, that might generate a combined $149,200 of pre-tax, inflation-adjusted income.
