Can I retire at age 65 with an IRA of $850,000 and Social Security benefits of $2,800?

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For many retirees, prudent withdrawals from a smart investment portfolio coupled with Social Security benefits can provide stable income to support their spending needs. But what if you have $850,000 in your IRA and $2,800 in monthly Social Security benefits: Is that enough to retire at age 65?

To answer this question, you must carefully examine your retirement income planning and spending. You can use some shorthand methods to estimate your income and postretirement expenses, but a better approach is to create a detailed budget and income forecast. Only then can you decide with confidence whether you can retire at age 65. If you want a deeper understanding of how much income your nest egg could generate in retirement, consider talking to a financial advisor.

A man checks his IRA balance on his laptop in the kitchen.

A monthly Social Security benefit of $2,800 is a solid financial foundation for your retirement. This benefit is as reliable as anything in finance and adjusts annually to keep pace with inflation.

After that, things become less certain because the amount of income your IRA is expected to generate each year depends on many assumptions. One popular approach assumes that you can safely withdraw 4% (with subsequent withdrawals adjusted for inflation) from a balanced portfolio (50% stocks, 50% bonds) in the first year of retirement and reasonably expect that your money will Lasts 30 years or more. This means you can withdraw $34,000 from your IRA in the first year. If inflation reaches 2% that year, you would withdraw $34,680 the next year, and so on.

A more detailed look at income possibilities might consider how much income you could earn from various assets. You could keep it as cash and potentially earn 5% or $42,500 per year at current CD rates. This hasn't even touched the principal yet. However, interest rates fluctuate, so you may choose long-term fixed income securities. The ten-year Treasury note currently pays interest semiannually at 4% per year, which would produce the same annual income of $36,400 as a 4% withdrawal rate, again without affecting the principal.

Stocks offer another option. Historically, the S&P 500 has returned nearly 10% annually. However, you can't expect your $850,000 IRA to reliably generate $85,000 per year. This is due to fees, volatility, and other factors that tend to drive actual long-term returns below average. However, investing the majority of your portfolio in stocks could see you withdraw more than 4% of your money each year.

Annuities can help you, too. These are contracts with insurance companies that guarantee you a fixed monthly payment for the rest of your life in exchange for usually a lump sum payment. Annuities are complex, come in many varieties, and often have high fees, but they are reliable. For example, New York Life's fixed benefit annuity currently pays nearly 7%.

These income options could bring in $34,000 to $85,000 per year, on top of the $33,600 you collect from Social Security. All told, you could earn between approximately $68,000 and $119,000, although the top income depends on your portfolio generating an average annual return of 10%, which may not be realistic in the future.

A financial advisor can help you calculate how much income you may need in retirement and how much your assets are expected to generate.

A woman reviews her projected retirement expenses to determine whether she can afford to retire at age 65.
A woman reviews her projected retirement expenses to determine whether she can afford to retire at age 65.

Whether this income range is sufficient for retirement depends on how much you plan to spend. Of course, your costs will vary greatly based on your lifestyle, whether you live in a high-cost area, how much you want to travel in retirement, and other factors.

According to the U.S. Bureau of Labor Statistics, people ages 65 to 74 will earn just over $68,000 on average in 2022, while people in the same age group will spend an average of nearly $61,000 a year.

A Fidelity analysis of people ages 50 to 65 found that most retirees end up spending 55% to 80% of their preretirement income on retirement. So if your income is close to the national average for that age group, you might plan to replace $37,400 to $54,400 with various sources of retirement income.

If you were making much more money before retirement (say, $150,000 per year), you would want to replace $82,500 to $120,000 to maintain your current standard of living.

Of course, many people are not average. A more personalized way to estimate your postretirement expenses is to prepare a detailed postretirement budget. For most retirees, the largest expense is housing. Other major expenses that need to be added include food, taxes, and medical expenses.

Like income, expenses can vary. For example, you may want to spend close to 90% of your pre-retirement salary. Or, if you're heavily invested in stocks, you may want or have to reduce your spending if a bear market reduces your returns. If this happens, consider that housing is also the most variable expense. You may save a lot by downsizing or relocating to a lower-cost area. If you're not sure how to plan for your retirement income, you may want to discuss it with a financial advisor.

Income and expenses are two sides of the retirement equation. An IRA of $850,000 and a monthly Social Security benefit of $2,800 may generate enough income to cover the typical retiree's living expenses without taking on high risk. Depending on your investment choices, your income can vary significantly. The same goes for retirement expenses, which depend on your lifestyle, where you live and other factors. To best guide your retirement decisions, carefully evaluate your risk appetite and ability to spend flexibly.

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