With $900k in a Roth account and $2,200 a month in Social Security, is it feasible to retire at age 66?

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Imagine you have $900,000 in a Roth IRA and collect another $2,200 per month in Social Security. Can you afford to retire at 66?

A good way to answer this question is to start with your budget. How much do you expect to spend on essentials, such as housing and monthly fixed expenses, and how much will it cost to maintain your lifestyle? Then take a look at your retirement income and compare all of those numbers. (And if you need additional help planning for retirement or creating an income plan, consider speaking with a fiduciary financial advisor.)

Income and expense planning

For the sake of argument, let’s say you earn a median household income of $75,000. Conventional wisdom suggests that you will need about 80% of your pre-retirement income to maintain your current lifestyle in retirement. That would mean your Roth IRA withdrawals and Social Security benefits would need to generate about $60,000 before taxes and about $54,600 in after-tax income.

Can that work?

To start, you have $26,400 per year in Social Security benefits. Since full retirement age is 67 for most, your benefits would be around 7% if you claimed them at age 66. (Based on these numbers, you would receive $28,295 per year in benefits if you retired at age 67.)

You also have your Roth IRA, which will eliminate your potential tax liability on both your portfolio withdrawals and your Social Security. Since your Roth withdrawals are not taxable income, your Social Security benefits would not trigger any federal income tax either. Additionally, Roth accounts are not subject to required minimum distributions (RMDs) when you reach age 73, giving you more flexibility compared to a pre-tax account.

The problem is that your Roth portfolio is relatively light to support a full retirement. You might be able to make the numbers work, but there wouldn’t be much wiggle room in your budget.

For example, let’s take the classic 4% withdrawal rule, which requires you to withdraw 4% of a balanced portfolio in your first year of retirement and then adjust subsequent withdrawals for inflation. The 4% rule is designed to extend a portfolio to at least 25 years.

Withdrawing 4% from a $900,000 Roth IRA would give you $36,000 in your first year of retirement. With Social Security, you would have a combined retirement income of about $62,400. Again, this is tax-free income. But it doesn’t exceed your spending needs by much, which limits your flexibility. More importantly, if your lifestyle or the area you live in is even slightly more expensive than average, this may not work at all.

You might also consider investing in an annuity. At $900,000, a representative lifetime annuity could earn you about $70,440 per year ($5,870 per month), according to Schwab’s Income Annuity Estimator. That would give a combined annual income of approximately $96,840 (with Social Security).

This may be enough to provide some households with a comfortable standard of living; This income will not be protected against inflation. As a result, a large portion of your retirement income would lose purchasing power over time. (Whether you need help protecting your money from inflation or evaluating annuity options, consider working with a financial advisor.)

Waiting has value

Alternatively, you could consider delaying your retirement by a few years. This can be especially attractive if you want to build more flexibility into your budget so you can afford some luxuries, leisure and travel.

If you delay retirement three years and claim Social Security at age 69, your benefit would increase to $32,823 per year ($2,735 per month). Second, with the S&P 500’s 10% average annual rate of return, your Roth IRA could potentially grow to about $1.22 million.

Even if you use a 4% withdrawal rate, your Roth portfolio could generate about $48,880 in your first year of retirement. Combined with Social Security, you would have $81,712 in year 1. Or you could invest the entire $1.2 million in an annuity that could pay you about $95,000 per year. As a result, you would have a combined income of more than $127,000 in your first year of retirement.

In both cases, delaying retirement would give you much more financial flexibility for a comfortable and sustainable lifestyle. (A financial advisor can help you evaluate when you can retire.)

Conclusion

With $900,000 in a Roth IRA and $2,200 per month in Social Security, you may be able to afford to retire at age 66. However, this could mean a tight budget and reduced margins. Instead, it might be wise to wait a couple more years to allow your portfolio and profits to grow a little more.

Retirement Budget Tips

• Social Security plays an important role in most Americans’ retirement budgets. Figuring out when to claim your benefits is an important step in the retirement planning process. SmartAsset’s Social Security calculator can help you estimate how much your benefits will be at different claiming ages.

• A financial advisor can help you create a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with potential clients and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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