What is a realistic retirement budget? I am 48 years old, save $430,000, and make $95,000 a year

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When estimating your retirement income, a popular rule of thumb is that you typically need about 80% of your income from work to maintain the same standard of living. This is caused by a number of factors, including the fact that you no longer need to save for retirement.

Of course, this number is flexible and will vary from family to family. For example, if your current standard of living is significantly lower than your income level, you may be able to safely estimate the lower level. If you live paycheck to paycheck, you may need to plan to increase your income or reduce your expenses. But 80% is a good starting point.

For example, let's say you are 48 years old and currently earn $95,000 per year. With a 401(k) of $430,000, what kind of retirement budget should you plan?

Here's how to think about this question. You may also consider using this free tool to get matched with a financial advisor to discuss your specific situation and how to plan accordingly.

Typically, we start with your funds and build a budget from there. This time, though, let’s start with your spending. Here, you earn $95,000 per year. So, based on our rough estimate, let's first assume that you need about $76,000 per year/$6,350 per month to maintain your current standard of living ($95,000 * 0.8).

But the math doesn't end there.

Here we have a few major attractions. First, at age 48, you're likely to have some expenses that you shouldn't have in retirement. Most notably, spending or saving priorities related to dependents may decline in retirement. For example, special savings for your children's expenses or a college fund are major parts of your budget you may not need in retirement.

On the other hand, full retirement age is about 20 years away. That's a long time, and there's plenty of room for growth in your income and lifestyle. This makes your future needs even more difficult to predict, since it's entirely possible that by the time you're 67, you'll be living on more than $95,000 per year.

In general, do your best to anticipate foreseeable changes in your life and needs. But beyond that, we can start by planning to maintain our current standard of living with our current income.

Next, keep in mind the long-term costs associated with retirement. Most notably, your budget should always anticipate taxes and inflation.

When you withdraw income from a pre-tax retirement account, you will pay income taxes in full. Just as you currently don't live on more than $74,571 after taxes, withdrawing $76,000 from your retirement account each year would actually produce $61,205 in annual disposable income. Because of RMDs (Required Minimum Distributions), you cannot avoid these taxes indefinitely, even if you have other sources of income.

That said, how you hold the money will affect your taxes. Funds held in a pre-tax account (such as a 401(k) or traditional IRA) will be subject to full income tax in retirement. Funds held in a Roth IRA or Roth 401(k) will be taxed immediately, but not in retirement. Funds held in a taxable investment portfolio will be subject to either capital gains tax or income tax depending on the nature of the asset.

At age 48, a Roth conversion may be a good way to save money in the long run. You still have enough time before retirement that the long-term tax-free growth of your portfolio (which may be far more than that) can offset the upfront conversion tax. The challenge will be liquidity. If you do a one-year conversion plan, you'll owe at least $128,047 in conversion taxes. Since you're younger than 59.5, you can't withdraw the money from your 401(k), so you'll need to find it elsewhere.

No matter how you structure it, over time that money will be worth less as inflation gradually drives up prices. Generally speaking, you should plan to increase your portfolio withdrawals by about 2% each year to keep up with inflation, and your retirement plan should take this into account.

Talk to a financial advisor to help you develop and execute a retirement strategy based on your goals and circumstances. They can help you predict your needs under various scenarios, taking into account taxes, inflation and other factors.

Once you have an idea of ​​your likely future needs, the question is how it will match up with your likely future income. Start by estimating your Social Security benefits.

You still have plenty of working years left, this is still a rough estimate. Your future earnings will affect your Social Security credit, and if your earnings increase, your benefits may increase significantly. However, based on your current income, we can first assume that you will receive approximately $40,897 per year / $3,408 per month (in 2025 dollars).

This is your expected full retirement age (currently 67). If you wait until age 70, you can increase that to a potential $50,712 per year/$4,226 per month. Again, these are base numbers. The more you earn in future years, the greater your future Social Security benefits will be, up to the program's maximum taxable income ($168,600 in 2024).

After you estimate Social Security, we need to estimate your potential future portfolio income. Here, we start with $430,000 in a 401(k) at age 48. This is good news because even with a conservative portfolio strategy, you're currently in a strong pre-retirement position.

For example, let's say you invest entirely in corporate bonds and the bond market returns an average of 5% annually. If you continue to contribute 10% annually and retire at age 67, you could have approximately $2.36 million in your retirement portfolio. Even with a conservative 4% withdrawal strategy, this would generate $94,400 in annual portfolio income, for a total annual income of $135,297 including Social Security.

On the other hand, you can choose a more aggressive strategy. Many financial professionals argue that investors should pay more attention to stocks most of the time when making money. So, here, let's say you invest in a mixed-asset portfolio of bonds and stocks looking for an 8% annual return. If you continue to contribute 10% each year, this portfolio may be worth just under $5 million after 29 years.

Using a 4% withdrawal strategy could potentially generate approximately $199,600 in annual portfolio income, for a total annual retirement income of $240,497. This is a better representation of what you're likely to be like in retirement than a pure bond portfolio, since you should be investing while you're working to get more growth. While this may seem like a lot more than you need, consider the fact that an inflation rate of 2.5% over 20 years would make an income of $240,000 actually worth about $146,000 in today's dollars.

This provides two basic answers to our title question. First, your actual retirement budget in today's dollars is $76,000 per year. Depending on your current income, this number may allow you to maintain your current standard of living in retirement (adjusted annually for inflation). Second, your actual retirement budget is also about $240,000 per year, which is equivalent to $146,000 today. This is the income your portfolio can realistically generate, based on your current income, investment portfolio, and reasonable growth projections.

With an income and a portfolio like that, you're in a very good position. Enjoy and consider consulting a financial advisor for personalized advice.

There are two answers to a realistic retirement budget. First, the rule of thumb is that you will need about 80% of your current income to maintain your standard of living in retirement. Second, by estimating your Social Security benefits and likely portfolio returns, you can predict your portfolio's long-term returns. Then you just have to make sure the two numbers match.

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