I'm 62, Have $800,000 and Will Receive $2,600 Monthly from Social Security. What's My Retirement Budget?

Planning for retirement can be both exciting and challenging. Figuring out how much you can realistically spend each year is a key piece of that puzzle. For example, a 62-year-old with $800,000 in savings and a monthly Social Security benefit of $2,600 can reasonably expect an annual income of $63,200 in retirement.

Figuring out how much income you can expect to generate in retirement can be complicated but a financial advisor can help. Connect with a fiduciary advisor today.

However, this figure can vary greatly depending on your individual circumstances. A key variable is whether your $800,000 is held in a taxable, tax-free or pre-tax account – or a combination of the three. Additionally, how your funds are invested within these accounts significantly impacts your financial outlook.

Income Considerations

Social Security benefits are inflation-adjusted and have been paid without interruption since 1940. Current projections indicate benefits may be reduced by 17% in 2035, however, unless Congress acts to shore up the program's trust fund.

Previous threats to Social Security have been fended off by increasing taxes, extending the retirement age and making other modifications that enable the program to continue paying benefits. There's no way to know for sure that Congress will do that again, but a number of fixes including raising or eliminating the income cap on Social Security taxes are available and likely to work.

Assuming Social Security benefits aren’t reduced, a $2,600 monthly benefit means you could expect $31,200 in guaranteed income in your first year of retirement.

The amount of income you could receive from your $800,000 portfolio would be less certain. The commonly used 4% safe withdrawal rate guideline calls for withdrawing 4% of your savings in the first year of your retirement and adjusting that number for inflation thereafter. If you plan to follow the 4% guideline, you would have another $32,000 in income in year 1 of retirement, with subsequent annual withdrawals increasing to reflect inflation.

Combining $31,200 in annual Social Security benefits with $32,000 in investment income gives you a pre-tax income of $63,200. If you're single and live in a location with average living expenses, this may be enough to fund a comfortable retirement. According to the Census Bureau, the median real inflation-adjusted income for a householder age 65 or older in 2022 was $50,290, about $12,910 less than what you would have in our hypothetical scenario. However, a financial advisor can help you design a retirement income plan based on your unique needs and resources.

What Types of Accounts Do You Have?

A couple goes over their projected retirement budget together.
A couple goes over their projected retirement budget together.

Taxes can be one of your biggest expenses in retirement and the types of accounts that hold your $800,000 can dictate the taxes you pay. If your savings are in a pre-tax retirement account such as a traditional 401(k), all withdrawals including contributions as well as earnings will be taxed as ordinary income. Keep in mind that withdrawals from a pre-tax retirement account will increase your taxable income, which can cause some of your Social Security benefits to be taxed.

If your money is in a brokerage account or savings account with no tax advantages, your account’s growth will be subject to capital gains taxes, ordinary income taxes or both. This income can also lead to taxes being applied to your Social Security benefits. However, your initial principal deposits won’t be taxed.

If you save using a Roth IRA or similar after-tax account, earnings accumulate tax-free and you also won't have to pay income tax on withdrawals as long as you meet certain guidelines, including making your first Roth contribution at least five years earlier. This is the most favorable scenario from a tax perspective, as Roth withdrawals also won't impact how your Social Security benefits are potentially taxed.

Strategically allocating your assets across different accounts with various tax statuses is known as asset location, and a financial advisor can help you execute this important strategy.

The Importance of Asset Allocation

Along with the type of account you have used to save, the way you invest the funds in the account is also really important. If you invest the entire $800,000 in bank certificates of deposit, you could generate $40,000 per year without touching the principal at current rates of about 5%. You can't count on renewing CDs at these rates forever, but you could invest in 10-year U.S. Treasury Notes, currently paying 4% annually. That would give you the same $32,000 in income as the 4% withdrawal rate without reducing the principal.

To counter potential inflation spikes that would reduce your purchasing power, you could invest in stocks. The S&P 500, for instance, has historically returned an average of nearly 10% per year. However, this return also fluctuates significantly from year to year, so you can't expect to reliably earn $80,000 from your stock investments year-in and year-out.

Traditional approaches to asset allocation can result in a portfolio consisting of some cash, some fixed-income securities and some stocks, possibly including other options such as fixed-income annuities like one from New York Life currently guaranteed to pay over 7% for as long as you live. Diversified portfolios such as these are generally regarded to be the most reliable way to generate the highest return from your assets. But if you need help selecting investments that meet your needs, connect with a financial advisor and talk it over.

Other Variables to Consider

A retired couple meets with their financial advisor to go over their financial plan.
A retired couple meets with their financial advisor to go over their financial plan.

In addition to these choices, you could have a host of other options for increasing your income or reducing your expenses, including the following:

  • Delay retirement. Every year you keep working is another year your savings can grow. Assuming a 7% annual growth rate, your $800,000 in savings will increase by $56,000 before taxes if you wait just one more year.

  • Delay Social Security. Waiting to claim Social Security after your current age increases the amount you'll receive each month for life. If you delay claiming until 67, your $2,600 benefit would grow to $3,380.

  • Reduce housing expenses. Housing is the single biggest cost for retirees, accounting for more than a third of the typical retiree's budget. It's also the expense that varies most by location. By moving to a less costly area or simply downsizing, you can significantly increase how far your retirement income goes.

Uncertainty is inescapable in retirement planning. Future inflation, tax rates and your own health and longevity are important factors that can only be estimated. A carefully constructed retirement plan takes into account these factors and may address them with insurance and other tools to keep risk within acceptable limits. That’s where a financial advisor can help.

Bottom Line

With $800,000 in savings and $2,600 in Social Security benefits at age 62, a conservative estimate gives you about $63,200 in income. You may be able to generate more income, depending on how the money is invested and the type of account it is in. If necessary, you could keep working and delay claiming Social Security for a year or two, or relocate to a less costly area to make your income go further.

Retirement Planning Tips

  • A financial advisor can help you do scenario modeling to see how different scenarios could play out. SmartAsset's free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost 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.

  • As you can see, a lot goes into a person’s readiness for retirement. Luckily, SmartAsset's free retirement calculator can help you gauge how much income you can expect to have in retirement and whether it will be enough to support your projected expenses.

  • Maintain an emergency fund in case you run into unexpected expenses in retirement. An emergency fund should be liquid – in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff 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.

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