Planning for Retirement
By: Tax Hotline
Summer 2025 (Vol. 43, No. 2)
Estimate Your Retirement Income
- Social Security
- Pensions or annuities
- Withdrawals from 401(k), IRA, or Roth accounts
- Part-time work or rental income
- Investment dividends or interest
In 2025, the average monthly social security benefit is $1,867. The most common guideline for withdrawals from retirement accounts is the 4% rule. This suggests that you can safely withdraw 4% of your retirement savings in the first year of retirement and then adjust annually for inflation. The actual sustainable rate can vary based on several factors including investment returns, life expectancy and inflation.
Estimate Future Expenses
Review your bank and credit card statements to identify spending patterns. Break expenses into:
- Essentials: housing, utilities, groceries, insurance, healthcare
- Discretionary: travel, dining out, hobbies, subscriptions
- Seasonal: property taxes, gifts, insurance premiums
For a simple method divide your income into 50% for needs, 30% for wants and 20% for savings or unexpected costs. To break it down:
- Needs (50%) for home mortgage, rent, property taxes. home and health insurance, utilities, groceries, transportation, debt payments and other essential services.
- Wants (30%) for things you could cut out if you had to such as travel, hobbies, dinner out, gifts and entertainment.
- Savings and Debt Reduction (20%) This category is for extras which include emergencies, unplanned upgrades or paying extra on debt.
*Don’t forget your healthcare costs. Medicare premiums (Part A is free for most Americans but Part B is $185/month in 2025) You may also need coverage for prescriptions, dental, vision, and hearing.
Plan Your Retirement Date and Withdrawls
Be aware of Required Minimum Distributions (RMDs) starting as early as age 73. Consider Roth conversions to reduce future tax burden.
The “best” age to take Social Security benefits depends on your health, financial needs, and life expectancy — but here’s how things look in 2025:
Claiming at Age 62. On the plus side, you get money sooner, which can help if you retire early or need income. However, your monthly benefit is permanently reduced by up to 30% if your full retirement age (FRA) is 67. In addition, individuals under the FRA can earn up to $23,400 without losing any Social Security benefits. If they earn over that amount, $1 in benefits will be deducted for every $2 earned above the limit. Retiring at 62 is best for those with shorter life expectancy, limited savings, or who need income immediately and for those who don’t plan on earning wages over the limit.
Full Retirement Age (67 for anyone born in 1960 or later.) Claiming at full retirement age gives you 100% of your earned benefit. You can continue working with no income limits and no reduction in your benefit. You can also retire on January 1 of the year you turn FRA and earn up to $62,160 with no benefit reduction. Taking Social Security at full retirement age is the most popular choice and considered best for those who want a balance between early access and full payout.
Waiting Until Age 70. Your benefit increases by 8% per year past full retirement age, up to age 70.
Waiting does give you a higher benefit but you will wait longer to receive payments. Even if you don’t need the income at age 67, you can put the income into investments and let if grow. Let’s say your monthly benefit is $2,000 at age 67. If you wait until age 70 you would increase that monthly payment 24% to $2480. But, by delaying, you lost out on collecting $2,000 per month for the past three years, which equals $72,000 ($2,000 x 36 months). It will take 12.5 years for you to break even and start realizing the extra benefit. ($72,000 divided by $480) In addition, fears of future cut or drastic changes to social security prompt more Americans to forego waiting and take benefits at full retirement age.
This ‘waiting’ strategy may work best for individuals with other income sources or those who want to limit income or maximize survivor benefits for a spouse.