With $900,000 in a Roth and $2,200 monthly Social Security, is retiring at age 66 feasible?

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Imagine you have $900,000 in a Roth IRA and receive 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. What do you expect to spend on essentials, such as housing and fixed monthly costs, and what does it cost to maintain your lifestyle? Then take a look at your retirement income and see how all those figures compare. (And if you need extra help planning for retirement or creating an income plan, consider talking to a fiduciary financial advisor.)

Income and expenditure planning

For the sake of argument, let’s say you earn the 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 should generate about $60,000 before taxes and about $54,600 in after-tax income.

Can that work?

For starters, you’ll have $26,400 a year in Social Security benefits. Since most people’s full retirement age is 67, your benefit would be about 7% if you file at age 66. (Based on these figures, you would receive $28,295 per year in benefits if you retired at age 67.)

You also have your Roth IRA, which eliminates your potential tax liability on both your portfolio withdrawals and your Social Security. Because your Roth withdrawals are not taxable income, your Social Security benefits also do not generate federal income taxes. 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.

Take, for example, the classic 4% rule for withdrawals, which requires you to withdraw 4% from a balanced portfolio in your first year of retirement and then adjust subsequent withdrawals for inflation. The 4% rule is intended to extend a portfolio for at least 25 years.

If you withdraw 4% from a $900,000 Roth IRA, you’ll get $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, limiting your flexibility. More importantly, if your lifestyle or the region you live in is even slightly more expensive than average, this may not work at all.

You can also consider investing in an annuity. At $900,000, a representative lifetime annuity could pay 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 about $96,840 (with Social Security).

This may be enough to provide some households with a comfortable standard of living, but this income will not be protected against inflation. As a result, much 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.)

There is value in waiting

You can also choose to postpone your retirement for a few years. This can be especially attractive if you want to build more flexibility into your budget so you can afford some luxury, leisure and travel.

If you delay retirement by three years and start claiming Social Security at age 69, your benefit increases to $32,823 per year ($2,735 per month). Second, at the S&P 500’s 10% average annual 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 either case, delaying your retirement would give you much more financial flexibility for a comfortable, sustainable lifestyle. (A financial advisor can help you determine when you can afford to retire.)

In short

With $900,000 in a Roth IRA and $2,200 a month in Social Security, you may be able to afford to retire at age 66. However, it can mean a tight budget and tight margins. Instead, it may be wise to wait a few more years so your portfolio and benefits can grow some more.

Retirement Budgeting Tips

• Social Security plays an important role in the retirement budgets of most Americans. 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 benefit will be at different claiming ages.

• A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your 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.

• Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/Charday Penn, ©iStock.com/Vadym Pastukh, ©iStock.com/Wasana Kunpol

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