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From one perspective, by age 67 your retirement budget is largely set in stone. The accumulation phase of your working life is over, and whatever set of savings and benefits that you have is… well, what you have.
Looking at things that way, when it’s time to set your budget the next thing to do is run the numbers and see what kind of retirement your savings will bear.
Now, it isn’t always as tidy as that. If you don’t need all the money you have saved up, then you can consider charitable giving, estate plans or even growing your lifestyle. Or, if your needs significantly outstrip your potential income, it might be necessary to consider selling major assets, working in retirement, or moving to someplace with a lower cost of living. But for many households, your finances at a retirement will set your budget.
For example, let’s take an individual with $900,000 in their 401(k), $200,000 in a savings account and $2,400 per month in Social Security. Here’s how to look at your potential budget. You can also use this free tool to match with a financial advisor to discuss your strategy.
First, your Social Security benefits are a known quantity with some flexibility. At age 67 you are expecting $2,400 per month/$28,800 per year. That income will adjust for inflation.
However, you can boost this income by waiting to collect your benefits. After age 67, every month that you wait to begin collecting benefits will increase your lifetime benefits by a small amount. This increases until age 70, when you will receive the maximum benefits.
For anyone born in 1960 or later, this can increase to a maximum 124% of your full benefits at age 70. The SSA applies a different formula for retirees born before 1960, but for ease of use we will use the 124% figure since it applies to most people currently planning their retirements.
In this case, then, you could potentially increase your benefits up to $2,976 per month/$35,712 per year if you wait to begin collecting Social Security. This is a lifetime increase, so waiting to collect your benefits can generate a lot of money over time. However, it will also mean either delaying retirement or leaning more heavily on your investments for three years.
Right now, you have a combined $1.1 million spread across cash and investments. Your retirement budget will depend significantly on how you choose to manage that money.
Most broadly, this will be a balance of risk and reward. The more aggressively you invest, the higher your potential rate of return might be. This could give you a much higher income in retirement, but it will also expose your portfolio to much more volatility.
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