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When you think about whether you are financially prepared to retire or not, you want to think about it in a certain way. You have a lifestyle you want to maintain and a portfolio that can safely generate a certain amount of income each year. Once your costs and resources overlap, you can afford to retire.
Here we have $1.4 million in assets and $5,000 in monthly expenses. Depending on your personal situation, this type of portfolio can last until your retirement, if you plan it properly and can supplement it with sufficient social security income. The bigger question, however, is whether you can do that.if you retire before the age of 60.
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At age 59, you retire six years early and eight years early under Medicare and Social Security standards, respectively. This presents several problems, all of which will shift your retirement costs.
For the sake of this example, let’s say that someone in their 60s can live an average of about 87 years. This has given rise to the standard 4% rule for retirement planning. By anticipating 25 years of withdrawals, a 67-year-old retiree can plan for his average life expectancy, with some room for happy errors.
Using this example, if you retire at age 59, you may want to plan for more than 35 years or more of withdrawals to cover the same room for error. In that case, you’ll probably want to plan for annual withdrawals of less than 4%.
The earliest you plan to take Social Security is age 62, but if you do, the lifetime benefits will be lower. To receive “full” Social Security benefits, you must wait until age 67, and to receive the maximum benefits, you must wait until age 70. This increases the amount you need to withdraw from your portfolio while you wait for benefits to take effect. in.
You become eligible for Medicare at age 65. Between now and then, you will have to pay for your own health insurance. This will add to your monthly costs, meaning you’ll need to plan for about $5,500 per month, on top of the standard gap insurance and long-term care insurance that most retirees need to anticipate.
Finally, the longer you are in retirement, the more you should anticipate inflation. Ideally, you can develop an investment strategy that will help your portfolio cope with rising prices, or at least as long as the portfolio lasts.
This may remain a problem, however, as prices will completely double over the course of a thirty-year retirement at a modest 2% inflation rate. This problem becomes even more acute if you live in an expensive city, where prices and rents are rising faster than the national average.
Consider using this free tool to match with a financial advisor who can help you do the calculations for your situation.
This question assumes that this person has $1.4 million in assets, but the nature of those assets makes a big difference. For example, do you keep all this money in a retirement account or in a portfolio without tax benefits? Does a large percentage of this net worth consist of your home, and if so, are you planning to sell it?
This all matters because some asset classes are more liquid than others. If you’re like many people, you may not want to include your home equity in this plan at all, because converting it into useful cash may not be practical. And if you hold these assets in tax-advantaged retirement accounts, you can’t retire until age 59.5 without potentially incurring penalties (although you can avoid this with the rule of 55).
But for the sake of analysis, we’ll proceed with the assumption that this is $1.4 million in accessible portfolio holdings.
Our first back-of-the-envelope math doesn’t look great. You are 59 years old and (for ease of use) a life expectancy of 87 years. If you give yourself a five-year margin of error, that means you’ll need up to 33 years of portfolio withdrawals. Without assuming excessive portfolio returns, that will give you $3,535 per month in income.
The two questions here help explain portfolio returns and Social Security income. Social Security will supplement your income somewhat, but for this plan to work you will need above-average benefits. Specifically, you’ll need to collect about $2,000 a month in Social Security starting at age 67, which is full retirement age for most.
If you can plan this, you can withdraw €60,000 per year from your portfolio until the age of 67. That will bring you €920,000 in assets in eight years. At age 67, an annual withdrawal of 4% of that remainder earns $3,066 per month. From there, $2,000 in benefits per month will get you right back to that $5,000 goal.
Portfolio returns can also help change the math of your retirement planning. But this portfolio isn’t quite generous enough to accommodate the somewhat safe returns that will last you a lifetime. For example, you can invest in growth. According to Vanguard, a 60/40 portfolio of stocks and bonds has a good chance of generating a return of about 7% by 2024. If you hit that goal every year, you could theoretically achieve $98,000 in pure returns every year.
That could give you a strong retirement outlook that goes far beyond your needs, but Nothing is always guaranteed in the stock market. But that’s a very big question, because you then have to manage the volatility of a portfolio with a lot of stocks. Right now, your plan doesn’t include that margin for error, which means trying to live off the portfolio’s returns is a big risk. Consider talking to a financial advisor about the right investment and withdrawal strategy for your retirement goals.
A potentially safer option might be to wait. For example, let’s take the 7% return projection again. Let’s say you keep your portfolio invested in a 60/40 mixed pool of bonds and stocks, which generates 7% annually. If you wait until age 64, you could retire with almost $2 million in the bank. At full retirement age at 67, you could have $2.4 million.
Can you retire at age 59 with assets of €1.4 million? The answer is: maybe, but you have to think about it carefully. This would likely be a tight retirement without much room for error, and it won’t be long before you can get a comfortable retirement with sufficient security.
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.
You really can retire early, but you need to start planning in advance. Check out SmartAsset’s guide on how to retire early for more information.
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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