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 receive $2,250 from Social Security every month when you become eligible for benefits. Is this enough to retire at age 62?
The answer to that question might be yes, but chances are you’ll have to live on a tighter budget than you’d like in retirement. Even then, you can outlive your savings depending on how you manage your assets. That may not be a dealbreaker if you have a significant reason to retire at age 62, but it is a possible reason to consider waiting until full retirement age, if that’s an option for you.
Do you have questions about saving for your pension and building 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 you withdraw the remainder annually from your Roth IRA using the 4% rule.
Kevin Caldwell, CFP, principal at Golden Road Advisors, warns that when it comes to your income, there are many important unknowns in these types of retirement portfolios. For example, are you married? What state and city do you live in, and how does that affect your taxes and other major expenses? What increase in the cost of living do you expect, and what is your life expectancy? These details really matter.
Fortunately, one detail in this situation is already under control. With a Roth IRA, you’ve largely taken taxes out of the picture. This will significantly increase your effective income.
“The math is simpler,” Caldwell said. “In principle, no taxes on everything.”
With a 4% direct withdrawal from your Roth IRA and only 50% of your Social Security taxed, your taxable income is less than even an individual filer’s standard deduction. The net result is still not incredibly high, especially compared to your likely pre-retirement income.
If you receive $2,250 in Social Security benefits at age 62, that means you’ve almost maxed out your credit during your working life. Chances are you’re now earning around six figures, which at $67,000 a year would be a significant step down. But in many parts of the country it is a living income, even though it may not allow for much discretionary spending. If you need more help estimating the income you’ll need in retirement, consider consulting a financial advisor.
A woman reviews her finances while wondering if she can afford to retire at age 62.
Alex Ingrim, financial advisor at Chase Buchanan, explains how many of his clients have retired with similar financial situations. While it is certainly possible, it does require you to keep your expenses tight. This is especially true when factors like healthcare, insurance, housing, inflation, and more are taken into account.
“My biggest concern would be whether someone could stick to this budget, and whether they could actually retire early on a shoestring budget (for many locations),” Ingrim said.
This raises two concerns. First of all, it is not unreasonable to live to be over 90 years old today. You can probably outlive your savings on this budget. A financial advisor can help you estimate how long your savings will last.
Second, sticking to a disciplined budget is neither easy nor fun, especially for a married couple. This is what Ingrim is most concerned about.
“Retirement is an important transition for many people, and it helps to feel comfortable with the process, both psychologically and financially. It doesn’t help the transition if you worry about your budget month in and month out,” he said. “There is not a large margin of error in this scenario.”
Retiring at age 62 can significantly reduce your potential income, and therefore the chance that your money will last. When Caldwell calculated the success rate of this plan — retiring at age 62 with a million dollars in a Roth IRA — he looked at the numbers twice: once if you start collecting Social Security at age 62 and another if you file a claim at age 67.
“If Social Security is taken at age 62, the plan works 78% of the time,” he said. “At age 67 it works 86% of the time.”
Keep in mind that receiving 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 receive more than $3,000 a month.
The same goes for your Roth IRA. Delaying retirement until age 67 also gives 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%, your Roth IRA could be worth up to $1.5 million at age 67, according to Vanguard.
If you follow the 4% rule, you can afford to withdraw $60,000 annually from your Roth IRA in this scenario. Adding your enhanced 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.
If you would like to explore your retirement options further, please contact a financial advisor.
A woman discusses her retirement income plan with her financial advisor.
Yes, you may be able to retire early at age 62 with $1 million in a Roth IRA and $2,250 in monthly Social Security benefits. But you may have to limit your spending and live a more limited retirement than you might want. A better alternative may be to wait until full retirement age, grow your portfolio and benefits, and then retire in some style.
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.
Taxes play an important role in retirement income planning. By taking care of federal income taxes early, your Roth IRA significantly increases your retirement income. Here’s a closer look at how Roth IRAs compare to traditional IRAs.
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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