I’m 62 With $1.6 Million in an IRA and a $2,800 per Month Social Security. What’s My Retirement Budget?

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.

A more personalized approach is to estimate expenses based on individual retiree spending habits. To do this, a financial planner can gather data on current spending and then modify these figures based on likely needs after retirement. Modifications usually involve reducing the expenses. For instance, saving for retirement is likely to be a significant expense before retiring that will end upon retirement. Income taxes may also be lower. Retirees don’t owe FICA taxes on withdrawals or investment earnings, and at least a portion of Social Security benefits are also income tax-free.

However, some expenses, such as healthcare, are likely to increase in retirement. For one thing, Medicare eligibility does not begin until age 65, so someone who retires at 62 will have to pay premiums for private healthcare insurance for three years. You’ll also have to make sure your withdrawals suffice for required minimum distribution (RMD) requirements in a pre-tax account like your IRA.

If a retiree’s income and expenses don’t match, there are a number of ways to manage this. One of the most effective is to delay retirement. A 62-year-old is eligible for reduced Social Security benefits. However, claiming benefits at 62 reduces the amount paid by 30% compared to waiting until full retirement age at 67. Waiting five years will also allow the IRA balance to increase. At average annual earnings of 7%, $1.6 million grows to $2,244,083 in five years. Using the 4% withdrawal rate, this would increase annual withdrawals from $64,000 to $89,763 (not inflation-adjusted).

There also options for reducing expenses. Housing is both the largest and most variable expense for most retirees, consuming approximately a third of the typical retiree’s income. Downsizing to a smaller home or moving to a lower-cost area of the country can significantly reduce this major expense and help a retirement budget balance. And if you need help making more detailed calculations for your own situation, you can use this free tool to match with a financial advisor.

It’s likely that a $1.6 million IRA and $2,800 monthly Social Security benefit will cover the cost of a comfortable and secure retirement for most retirees. However, much depends on individual preferences and circumstances. A high-cost lifestyle or special situation can call for generating more income or require cutting major costs such as housing.

A financial advisor can help you prepare a retirement budget Finding a financial advisor doesn’t have to be hard. 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.
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Keep an emergency fund on hand in case you run into unexpected expenses. 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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