For most of your working career, the focus of your retirement planning is on accumulating savings and investing that money wisely. As you approach retirement, more attention will go to estimating your income after you stop working, and the kind of lifestyle that this will support. The way to do that is through building a retirement budget. This budget has two parts: income and expenses. You can estimate your income by using your expected Social Security or pension benefits, if any, and forecast for how much you can withdraw from your savings. You can then estimate your expenses by using your current salary or, for more detail, your current expenses minus those that will end when you stop working.
If you need help putting a retirement budget together, a financial advisor can work with you to evaluate income sources, estimate expenses and structure withdrawals based on goals and taxes.
Retirement Budget Building Blocks
You can begin your retirement budgeting process with either income or expenses. Either way, the goal is to make sure that the resulting budget is balanced, so that you aren’t spending more than you’re taking in or withdrawing an unsustainable amount from savings.
Many planners estimate retirement expenses as a percentage of your earnings the last year before retirement. Typically, 75% is the percentage. Relying on this rule of thumb, someone earning $100,000 the last year before retirement will likely need $75,000 to pay retirement living expenses.
Your actual expenses may vary significantly depending on your location, health, existing debt service requirements and other factors. You can craft a more individualized expense budget by looking at all your current expenses and subtracting those, such as work clothes and saving for retirement, that you won’t have after you stop working.
For the income side, many planners start by estimating future Social Security or pension benefits. A Social Security calculator can use your age, income and planned retirement age to forecast government retirement benefits. If you’re covered by a pension, your pension plan administrator can help you with this. Social Security benefits are as reliable as anything in the financial universe and are adjusted annually so you keep up with inflation.
After you’re done with that portion of benefits, consider income from investments. A widely used guideline here is the 4% safe withdrawal rate. This benchmark suggests you can withdraw 4% of your savings in the first year of retirement, then increase that dollar amount each year by inflation, with a historically low risk of running out of money over a 30-year period.
As an example, someone with $1 million in savings could withdraw $40,000 in the first year ($1 million × 4%). If inflation is 2%, the second-year withdrawal would increase to $40,800 ($40,000 × 1.02), reflecting an inflation adjustment rather than a new percentage of the portfolio.
Other strategies include investing for income with a portfolio heavy on fixed-income or dividend-paying securities and taking only the earnings without touching the principal. This is a highly conservative approach and may produce less income than withdrawing part of the principal. You could also buy an annuity, which would produce steady guaranteed income. In most cases, however, annuity payments won’t be indexed to inflation and, upon your death, won’t leave any principal to bequeath to heirs.
Breaking Down a Retirement Budget
For this example, let’s assume that your retirement expenses will be 75% of your pre-retirement income. So with an annual salary of $85,000, your expenses would be $63,750 ($85,000 x 75%).
Because your actual retirement spending can vary widely depending on income level, housing costs, healthcare needs, travel plans, lifestyle choices and local cost of living, you may want to use a percentage between 55% and 90% for higher or lower expenses. For example, higher earners may need less than 75%, while people on the low end of the income scale may require a larger percentage of pre-retirement earnings.
Building on the 75% expense estimate, if we assume that you will retire in six years at age 66 and are eligible for Social Security benefits, your retirement income would be about $84,034.
To get this estimate, first we used SmartAsset’s Social Security calculator to determine that someone born in 1966, earning $85,000 annually, could receive $39,613 in Social Security benefits (roughly $3,301 monthly). You should note that benefits could be higher or lower, depending on your earnings history. The Social Security Administration estimated in January 2026 that the average monthly Social Security benefit was $2,071 1 .
Next, we used SmartAsset’s investment calculator to estimate that $740,000 in savings at age 60 could grow to $1,110,540 in six years with retirement at age 66 (this growth assumed a 7% average annual growth rate). And using the 4% withdrawal rate, you could withdraw about $44,421 the first year of your retirement, which combined with $39,613 in annual Social Security benefits adds up to roughly $84,034.
Since this is significantly more than the estimate of $63,750 in expenses (75% of $85,000), it’s likely that retirement in six years could cover a comfortable lifestyle within these assumptions.
Refining Your Retirement Budget
Few retirees are exactly typical, however, and it may be necessary to fine-tune your retirement budget to reflect your individual circumstances. If you live in a high-cost city, have elevated medical costs for a health condition or have in mind a luxurious retirement lifestyle involving lots of travel, your expenses could be significantly higher than the rule of thumb suggests.
One way to increase your income is to delay claiming Social Security. Your benefit increases by approximately 8% for each year you delay claiming until age 70 2 . Delaying retirement will also give your nest egg more time to grow. That can also help you increase the amount you can safely withdraw to cover living costs.
If delaying retirement still isn’t enough, you may want to consider modifying your portfolio’s asset allocation from the 50-50 blend of stocks and fixed-income securities used to craft safe withdrawal rates to a more aggressive mix that aims to earn higher annual returns. However, you should keep in mind that doing so, specifically as you get older, will put your nest egg at a higher risk for market volatility.
Reducing your living expenses can also help balance a retirement budget that is too costly. Housing is the single biggest expense for most retirees, aside from healthcare, and also one of the most variable. With that in mind, one of the most effective ways to bring your expenses down is by downsizing or relocating to a less expensive city or state.
Bottom Line
With an $85,000 current salary and $740,000 saved for retirement, you could be good shape to retire by age 66. This is based on using popular planning guidelines to estimate $63,750 in living expense and $84,034 in income from investments and Social Security. If you expect to have higher-than-average expenses, want to retire sooner, aren’t eligible for Social Security or are otherwise in atypical situation, you may need to plan for a lower-cost retirement lifestyle or, perhaps, generate addition investment earnings by taking a more aggressive approach to investment management.
Retirement Planning Tips
- A financial advisor can work with you to develop and adjust a retirement plan based on specific goals and timelines. 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.
- If you want to manage risk, diversifying your portfolio is one common strategy. Here’s a roundup of 13 investments to consider.
- 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.
Photo credit: ©iStock.com/Ridofranz, ©iStock.com/Olga Shumitskaya
Read the full article here
