Ask an advisor: We are 65 years old, have a million dollars saved and $42,000 in social security benefits. Can we live on $90k a year?
Both my wife and I are 65 years old. She will retire this year, and I will work until I’m 67. We’ll get about $42,000 in Social Security and have about a million dollars in savings. Can we live on $90,000 a year?
-Terry
$90,000 a year will push the upper limit of what I would be comfortable with as a general rule of thumb. However, whether it will work for you is very individual. I’ll give you an overview of some of the things you might want to consider before you decide if you want to spend $90,000 a year. (And if you need extra help with retirement planning, consider working with financial advisor.)
Does your cost figure include taxes?
Will the $90,000 you expect to spend each year cover your annual tax bill, or is it how much money you plan to spend after taxes? The answer to this question is vital. If it’s the latter, you’ll need to withdraw even more of your savings each year, further stressing the longevity of your portfolio.
Whether your savings are held in a tax-deferred, Roth, or taxable account matters. My guess is that your money is mostly tax-deferred, meaning it’s held in 401(k)si IRAs. You’ll need to calculate the income tax you’ll owe when you start withdrawing that money. If a significant portion of your assets are in Roth accounts, your distribution is tax-free, which will simplify the process. (And if you want more help managing your retirement savings, consider merging with financial advisor.)
What is your investment plan and risk tolerance?
Ask an advisor: We are 65 years old, have a million dollars saved and social benefits. Can we live on $90k a year?
You must invest according to your own risk tolerance. But if your portfolio is too conservative or aggressive, it will further strain your savings.
If you and your wife are particularly conservative, this will likely hinder your ability to keep up with that level of spending over time.
If you are too aggressive, you can expose yourself to too much volatility, which can also destroy a retiree’s portfolio once withdrawals begin.
The 60/40 portfolio it has historically been so popular with retirees because it leaves them with enough capital to take advantage of the long-term growth often needed for a decades-long retirement without too much volatility. It’s not good for everyone, but the point is that if your entire balance is in CDs, for example, your money probably won’t grow fast enough. The opposite is true for a 100% stock portfolio. It is too volatile and one or two bad market years, especially early on, could be disastrous. (AND financial advisor can help you find the right mix of stocks, bonds, and other investments for your risk tolerance.)
What is your withdrawal rate?
Ask an advisor: We are 65 years old, have a million dollars saved and social benefits. Can we live on $90k a year?
A lot of retirement income planning focuses on your withdrawal rate. The classic “rule of thumb” is that if you withdraw 4% of your savings in the first year of retirement and adjust later withdrawals for inflation, you can be pretty sure your money will last 30 years. I use that term loosely. It’s not a hard rule, but more of a guideline for understanding safe withdrawal rates in a historical context. Most people should modify it in some way. You may not need or want to plan for your money to last 30 years, for example.
Again, depending on what that $90,000 cost includes, I think you could easily be looking at a withdrawal rate of around 5%, and quite possibly more. This is not necessarily scary. However, you should take some time to understand how your withdrawal rate affects your ability to maintain your spending without depleting your savings too quickly. (And if you need help determining an appropriate withdrawal rate, this tool can help you find a financial advisor.)
Conclusion
Whether your savings and Social Security benefits will be able to cover $90,000 in annual expenses depends on a number of factors. You should consider whether you need $90,000 before or after taxes and think about your investment mix and risk tolerance. You’ll also want to find out what withdrawal rate you’ll need to cover your retirement spending needs.
Tips for finding a financial advisor
Finding a financial advisor it doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three verified financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider several advisors before settling on one. It’s important to find someone you trust to manage your money. As you consider your options, these are the questions you should be asking an advisor who will ensure that you make the right choice.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations like the stock market. The trade-off is that the value of current money can be reduced by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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Brandon Renfro, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Do you have a question you want answered? Email AskAnAdvisor@smartasset.com and you may have your question answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and was compensated for this article.
