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With a net worth of $1.6 million and $4,500 in monthly expenses, retirement at age 63 is a possibility, but a lot of that depends on your circumstances. The income your assets will generate depends primarily on how much of it is in the form of liquid assets. Your personal risk tolerance is another important factor that will help determine how much your portfolio is likely to yield, and how much of the principal you are willing to withdraw to pay living expenses. In addition, how much and what other income you have, your tax situation and your life expectancy are important.
Do you have questions about retirement planning? Talk to a fiduciary financial advisor today.
Using the 4% rule of thumb, you can withdraw $64,000 in the first year and then adjust it upward annually for inflation. This rate equates to $5,333 per month, which is technically higher than your monthly expenses.
Now let’s look at the risks of this route. For starters, many advisors note that a 4% withdrawal rate won’t always work in all situations. Although it is designed to allow a conservatively invested portfolio to last at least thirty years under a wide variety of market and economic scenarios, it may not take into account all potential negative developments. For example, what if an era of high inflation, low investment returns, or unexpected expenses such as medical costs come into play? That could cause your monthly expenses to skyrocket or your portfolio to no longer keep up.
A lot also depends on how much of your wealth consists of investable, liquid assets that can generate active and accessible income. For example, let’s say your net worth of $1.6 million includes your paid-off personal home worth, say, $400,000. Although you get a lot of value out of your house (this would mean it takes up a quarter of your net worth), you can’t generate income from it unless you sell or rent it out.
In this scenario, if you subtract the value of the house, you would still have $1.2 million, but is another portion of it illiquid? Let’s assume not, and it’s all in some combination of cash, CDs, bonds, stocks, mutual funds, and retirement accounts. If you apply the 4% rule in this situation, you can safely withdraw $48,000 per year, or just $4,000 per month, leaving $500 per month in unfunded monthly expenses.
A fiduciary financial advisor can help you create a retirement income plan.
The good news is that if you’re like the average retiree, you’ll have sources of income other than investments. This includes social security benefits, pension benefits, annuity payments or income from part-time work.
Social Security is a source of income that a large majority of retirees can expect. According to the SSA, as of January 2024, the average Social Security benefit was estimated to be about $1,860. If you qualify for this average Social Security benefit, you’ll only need an additional $2,640 from investments or other sources to cover your $4,500 monthly expenses. Given this level of net worth, that should be technically feasible.
The downside is that these simplified analyzes do not take into account the effects of other factors, such as taxes and other outstanding costs. Both can eat up a significant portion of your investment returns before they are available to you.
If your investments don’t seem adequate to cover $4,500 in monthly expenses, there are a number of things you can do. Some options include:
Postponement of retirement: Waiting a few more years before retirement gives your investment portfolio time to continue to grow, postponing how many more years you personally need to cover. A $1.2 million portfolio that doesn’t include the value of your hypothetical $400,000 home among your investable assets could rise to nearly $1.4 million in three years, assuming a moderate annual growth rate of 5%.
Social security delay: Each year that you delay claiming benefits until age 70, your monthly benefit will increase. If you claim at the earliest possible age, 62, the benefit will be reduced by up to 30% compared to what you would receive at full retirement age of 67. After full retirement age, delaying filing increases your benefit by 8% per year until age 70. .
Increase investment income: Safe withdrawal rates are typically calculated based on very conservative portfolios of half stocks and half bonds, or even 60-40 allocations. Changing your asset allocation can increase your income and allow you to withdraw more, as long as you’re willing to accept the additional risk.
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.
To quickly gain insight into how much you need, enter your figures via SmartAsset’s pension calculator.
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.
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.
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