Have $500,000 to Spend in Retirement? Here's What You Can Budget per Year

If you're like many of us, you may be unsure whether you're saving enough for retirement. After all, no one knows for certain how much money they'll need throughout their golden years.

That said, if it looks like you're going into retirement with $500,000 put away, you can make certain assumptions about how much money you can budget for each year.

The 4% rule

While there is certainly debate regarding the "perfect" amount to withdraw from your retirement account each year, the long-held rule of thumb is 4%.

According to the 4% rule, if you have approximately 50% invested in stocks and 50% in fixed-income assets (like bonds), withdrawing 4% annually means you won't run the risk of running out of money for 30 years. That's because most of the money you withdraw will consist of interest earned on your investments.

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If you choose to follow the 4% rule, having a cool half million in savings means you can safely withdraw $20,000 the first year and make adjustments (depending on inflation) in the following years.

Add that to other sources of guaranteed income

Are you due to receive a pension or Social Security benefits? If so, you can add that amount to the 4% taken from a retirement account. If you're counting on Social Security benefits to pay the bills, how much you receive will depend on how much you earned during your working years and how old you are when you retire.

If you retire at age 67 (full retirement age for most people), your maximum benefit this year could be as much as $3,822. If you've postponed retirement until age 70, your maximum benefit would jump to $4,873. If you've had enough of work and get out of the rat race at age 62, the maximum benefit drops to $2,710.

How much you receive from any guaranteed source of income will entirely depend on your circumstances and work history. However, let's say you don't have a pension but do expect a monthly Social Security payment of $2,500 (according to the Social Security Administration, the average benefit for January 2024 was $1,907).

Monthly Social Security payments of $2,500 amount to $30,000 annually. By adding $30,000 to the $20,000 you plan to withdraw from your retirement account, you know that you have a minimum of $50,000 to budget per year before taxes.

Other variables

As you total up your guaranteed income, don't forget to factor in any other streams of income you may receive in retirement. If you have rental property or annuity payments, tack them onto your total.

Compare your anticipated income to your expected post-retirement budget. If it looks like you'll have plenty to see you through, that's great! If there's a gap, figure out how large that shortage is.

For most of us, retirement won't be the end of our dreams. If you plan to turn a hobby into a small business or work part-time outside the home, it can be good for you socially, mentally, and financially.

Let's say there's a $15,000 gap between your retirement income and how much you plan to spend each year. You know that your part-time gig needs to bring in at least $15,000 -- again, after taxes.

Ugh, taxes!

Knowing which sources of income will be taxed by the federal government is a crucial step in planning for retirement. This breakdown from Merrill Lynch should help you sort it out:

Before you panic: Keep in mind that if you bring in less money during retirement than you did when you were working, your tax bracket may drop.

Some states are kinda nice to retirees

How states handle taxes in retirement varies dramatically. For example, none of these states levy a state income tax, so you're in the clear:

• Alaska
• Florida
• New Hampshire
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

These four states don't tax retirement benefits, such as 401(k) accounts, IRAs, and pensions, leaving you with more money in your checking account each month.

• Illinois
• Iowa
• Mississippi
• Pennsylvania

These states don't let you off the hook entirely but tax a portion of Social Security payments:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont

Having a rough idea can be helpful

If you're just beginning to put numbers together, coming up with a post-retirement budget, and figuring out how much income you can expect, it's a good time to determine how much you can expect to pay in taxes. Check your state's tax rate, and don't forget to see which federal tax bracket you can expect to be in.

Of course, those brackets may change between now and the time you retire, but at least you'll have a good idea of how much you can expect your tax burden to fall.

If you're feeling nervous about retirement, you're not alone. The best we can do is double down on our efforts to put as much money away as possible, remain as healthy as possible, and do everything we can to create a retirement we'll enjoy.