There are two common ways to think about a retirement budget: you can start with the lifestyle you want or the assets you have. By focusing on a lifestyle, you can identify your target retirement income and then build savings to support that goal. For example, using the 4% rule, if your goal is to withdraw $100,000 annually in retirement income your savings target would be roughly $2.5 million ($100,000 ÷ 0.04). And, comparatively, by focusing on your assets, you would estimate both current and future savings and then set your expected retirement income and lifestyle around those resources. To show you how this works, let’s walk through an example of a 55-year-old with $620,000 in a 401(k) who earns $68,000 per year.
A financial advisor can help model both approaches, estimate realistic savings and income targets, and translate those projections into a retirement budget aligned with your goals and resources.
Start With Your Timeline
The first question to consider is when you want to retire. This decision affects how long you have to save, how long your money may need to last and which benefits will be available to you.
Retirement savings depend on both money and time. You may already have a sense of how much you have saved, but it is also important to determine how many years remain to continue contributing and growing those savings.
Retiring at 62 (the earliest age to claim Social Security) may involve decisions about reduced benefits, paying for health insurance before Medicare eligibility and funding a longer retirement period. By contrast, retiring closer to age 70 can increase Social Security benefits and provide additional years to save, though it may also raise questions about how long you plan to remain in the workforce.
Earlier retirement generally increases exposure to inflation and longevity risk. A longer retirement creates more time for rising costs to affect purchasing power and increases the possibility that savings will need to last longer than expected.
Your chosen retirement age helps shape your retirement budget because it influences both the assets and benefits available at retirement. Social Security defines full retirement age as 67, when most people can first claim unreduced benefits. Planning around this age is a common reference point for many households, and it is the assumption used here.
Plan Your Likely Portfolio
Once you have a sense of when you will retire, start estimating your likely assets. This estimate is based on your savings habits, contribution levels and investment approach.
Most households use a time-based approach to retirement investing. They tend to hold more volatile assets, such as stocks, earlier in life, when they have more time to recover from market downturns. As retirement approaches, many shift gradually toward more stable assets, such as bonds, to help reduce exposure to large losses.
For this example, assume a balanced strategy. Suppose your 401(k) is invested evenly between stocks and bonds, with an average annual return of about 8%, and you contribute roughly 10% of your income each year, or $6,800 annually.
- Annual contribution: $68,000 × 10% = $6,800
With 12 years until retirement, you can estimate future value by combining growth on existing savings and new contributions. Using SmartAsset’s investment calculator, the example can be broken down as follows:
- Starting balance: $620,000
- Annual contribution: $6,800
- Assumed annual rate of return: 8%
- Time horizon: 12 years
Using these inputs, the calculator estimates that the account could grow to $1,690,310 by the end of the 12-year period. Your actual amount will vary based on savings behavior and investment performance, but this figure will be used as a working example.
Now, the actual number will vary based on your approach to savings and investment. However, for the sake of example we will use this as our starting number.
Plan Your Likely Withdrawals
With your likely savings in mind, make a plan for withdrawals. This is the amount you expect to take each year from your portfolio to help cover expenses. The objective is to balance ongoing income needs with preserving assets so that savings can last throughout retirement.
Many people use the 4% rule as a starting point for estimating withdrawals. This guideline suggests withdrawing about 4% of your portfolio in the first year and adjusting future withdrawals for inflation. With an estimated portfolio value of $1,690,310, a 4% withdrawal would equal:
- $1,690,310 × 0.04 = $67,612, or roughly $68,000 per year
Some analysts note that current bond yields and market conditions may support different withdrawal assumptions. For example, if a portfolio were positioned toward bonds yielding about 5%, annual income could be estimated as:
- $1,690,310 × 0.05 = $84,516, or about $85,000 per year
Other retirees may choose to maintain a balanced portfolio that seeks higher long-term growth, recognizing that higher expected returns generally come with greater market volatility. For this example, assume a bond-oriented approach that targets approximately $85,000 per year in portfolio income.
Plan Your Likely Social Security Benefits
Estimate your likely Social Security benefits based on when you plan to begin collecting. The age at which you claim has a direct effect on the size of your monthly payment and the total income you receive over time.
Using SmartAsset’s Social Security calculator, if we assume that your annual earnings are $68,000, then your estimated benefit at full retirement age, which is 67, would potentially be around $2,575 per month, or $30,900 per year. Claiming earlier than full retirement age results in a permanent reduction in benefits. For example, starting at 62 can lower payments to roughly 70% of the full amount, or about $21,630 per year in this example.
Delaying benefits increases monthly payments for each month you wait, up to age 70. At that point, benefits can reach about 124% of the full retirement age amount, or approximately $38,316 per year in this example.
Base Your Budget on Portfolio Income, Benefits and Taxes
Your pre-tax budget is based on the combined income from your retirement portfolio and your Social Security benefits. Using the amounts that we established for the example earlier, the calculations are as follows:
Portfolio income (bond-oriented example)
- Estimated portfolio value at retirement: $1,690,310
- Assumed income rate: 5%
- $1,690,310 × 0.05 = $84,516, rounded to $85,000 per year
Social Security income (claimed at age 67)
- Estimated monthly benefit: $2,575
- $2,575 × 12 = $30,900 per year
Combined pre-tax retirement income
- $85,000 (portfolio income) + $30,900 (Social Security) = $115,900 per year
Because this example assumes savings are held in a traditional 401(k), withdrawals from the portfolio are generally subject to ordinary income taxes, and most Social Security benefits may also be taxable. Savings held in a Roth account generally allow qualified withdrawals to be tax-free, and taxation of Social Security benefits may be lower. Assets held in a taxable brokerage account are typically subject to a combination of capital gains and income taxes.
Bottom Line
One way to build a retirement budget is to start with the assets you have, project how those assets may grow, estimate a sustainable withdrawal level and then combine that income with expected Social Security benefits to arrive at a working budget. In this example, a 55-year-old with $620,000 in a 401(k) who earns $68,000 per year and contributes 10% annually could reach about $1.69 million by age 67, which could support roughly $85,000 per year in portfolio income using a bond-oriented approach, plus about $30,900 per year from Social Security at full retirement age, for a combined pre-tax income of approximately $115,900. Taxes will vary based on account type and individual circumstances, but this framework shows how timeline, savings, investment approach, withdrawals and benefits can be combined to estimate a realistic retirement budget.
Retirement Planning Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset’s RMD calculator to see how much your required minimum distributions will be.
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