A 62-year-old retiree smiles as her dog jumps on her back.
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Suppose you have $1 million in a Roth IRA and you will receive $2,250 each month from Social Security when you are eligible to receive benefits. Would this be enough to allow you to retire at age 62?
The answer to that question could be yes, but there is a chance that in retirement you will have to live on a tighter budget than you would like. Even then, you could outlive your savings depending on how you manage your assets. That may not be a deal-breaker if you have a strong reason to retire at age 62, but it is a potential reason to consider waiting until full retirement age, if that’s an option for you.
Do you have questions about saving for retirement and creating an income plan? Talk to a financial advisor today.
In this scenario, you can expect to live on about $67,000 per year, or about $5,583 per month. This consists of $2,250 from Social Security, while the rest is withdrawn from your Roth IRA using the 4% rule annually.
Kevin Caldwell, CFP, principal at Golden Road Advisors, cautions that when it comes to your income, there are many important unknowns in this type of retirement portfolio. Are you married, for example? What state and city do you live in and how will that affect your taxes and other important expenses? What cost of living increases do you expect and what is your life expectancy? These details really matter.
Fortunately, this situation already has a detail under control. With a Roth IRA, you have largely eliminated taxes. This will considerably increase your effective income.
“Math is easier,” Caldwell said. “There’s basically no taxes on any of that.”
With a 4% direct withdrawal from your Roth IRA and only 50% of your Social Security taxed, your taxable income is even less than an individual taxpayer’s standard deduction. The net result is still not incredibly high, especially compared to his likely income before retirement.
Receiving $2,250 in Social Security benefits at age 62 means you came close to maxing out your credits during your working life. There’s a good chance he’s making around six figures right now, which would make $67,000 a year a significant drop. But in many areas of the country, it’s a livable income, although it may not allow for much discretionary spending. If you need more help estimating how much income you will need in retirement, consider contacting a financial advisor.
A woman reviews her finances as she wonders if she can afford to retire at 62.
Alex Ingrim, a financial advisor at Chase Buchanan, details how many of his clients have retired with similar financial situations. While it is certainly possible, it requires keeping your expenses low. This is especially true after taking into account factors like healthcare, insurance, housing, inflation, and more.
“My biggest concern would be whether anyone can stick to this budget and whether they would actually enjoy an early retirement on a shoestring budget (in many places),” Ingrim said.
This raises two concerns. First of all, it is not unreasonable to live over 90 years old today. With this budget, it is likely that your savings will survive. A financial advisor can help you estimate how long your savings can last.
Second, it’s not easy or fun to stick to a disciplined budget, and that’s doubly true for a married couple. This is what worries Ingrim the most.
“Retirement is an important transition for many people and helps them feel comfortable with the process, both psychologically and financially. It doesn’t help the transition to be worried about the budget month after month,” he said. “There’s not a huge margin for error in this scenario.”
By retiring at age 62, you can significantly reduce your potential income and, with it, the likelihood that your money will last. When Caldwell calculated the success rate of this plan (retiring at age 62 with $1 million in a Roth IRA) he ran the numbers twice: once if you start collecting Social Security at age 62 and again if you claim it at age 67. years.
“If you take Social Security at 62, the plan works 78% of the time,” he said. “At 67 years old, it works 86% of the time.”
Remember, collecting Social Security at age 62 reduces your lifetime benefits by up to 30%. But if you wait until full retirement age (67 for people born in 1960 or later), you would collect more than $3,000 per month.
The same goes for your Roth IRA. Delaying retirement until age 67 would also give your Roth IRA more time to grow tax-free. If you keep your investments in a standard 60/40 portfolio with an average annual return of 8.7%, according to Vanguard, your Roth IRA could be worth up to $1.5 million by age 67.
If you follow the 4% rule, you could afford to withdraw $60,000 annually from your Roth IRA in this scenario. Adding your increased Social Security benefits would increase your retirement income to about $96,000 per year, giving you a significantly more comfortable lifestyle compared to retiring at age 62.
Talk to a financial advisor if you want to further explore your retirement options.
A woman reviews her retirement income plan with her financial advisor.
Yes, you could potentially retire early at age 62 with $1 million in a Roth IRA and $2,250 in monthly Social Security benefits. But you may need to restrict your spending and live a more limited retirement than you would like. A better alternative may be to wait until full retirement age, let your portfolio and benefits finish growing, and then retire in some style.
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.
Taxes play an important role in planning for retirement income. By handling federal income taxes early, your Roth IRA greatly increases your retirement income. Here’s a closer look at how Roth IRAs compare to traditional IRAs.
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.
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