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With careful planning, a comfortable retirement from age 60 can be financed with $2.5 million. But as with any major life transition, retirees must balance a complex set of variables, from taxes to healthcare, to ensure their savings last for decades. While everyone’s situation varies, this level of savings can provide the most flexibility for retirement if desired, especially if it comes with even a modest Social Security income starting a few years later.
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Deciding whether you have enough saved for retirement depends on estimating future costs and income streams over an expected lifespan. In its simplest form, this involves projecting the income you will have from various sources and creating post-retirement budgets for expenses.
To make an optimal decision, especially if you are considering retiring earlier than usual, you should also take age-related factors into account. These include health care costs before you became eligible for Medicare at age 65 and penalties for most withdrawals from retirement accounts before age 59.5.
Social Security timing strategies are also important. These are based on personal circumstances and require a trade-off between maximizing monthly benefit amounts and starting benefits earlier. Another important consideration is the Required Minimum Distribution (RMD) rules, which take effect after age 73.
Identifying an appropriate withdrawal rate that preserves principal is also critical. This will vary depending on your portfolio strategy, asset allocation and investment performance. However, it is often suggested to use a rate between 4% and 6% depending on where you look.
Instead of trying to figure out your personal retirement income and expenses in detail, you can use income replacement. For example, for a 60-year-old earning $100,000 annually, the target budget for income might be $70,000 per year. An income replacement guideline of 70% is used.
The 4% withdrawal rate is another guideline that assumes that withdrawing that percentage from a portfolio each year, adjusted for inflation, will ensure that a savings pot lasts as long as a normal pension. Withdrawing 4% annually from a $2.5 million portfolio would produce $100,000 in retirement income. This covers the income replacement goal of $70,000, with a nice cushion of $30,000 per year.
For most people, savings are only one source of potential income in retirement. Furthermore, this person could start receiving Social Security benefits as early as age 62. Alternatively, they can wait to claim their benefits until they reach full retirement age at age 67, or even longer at age 70. This would make them eligible for higher monthly benefit amounts, with the tradeoff of starting them later.
Taxes are another important part of this decision. While completely avoiding taxes isn’t possible, there are steps you can take to manage or minimize taxes. For example, if you convert some of your pre-tax savings into a Roth IRA early enough before retirement, you could avoid tax bills later at the cost of paying more taxes now. An advisor can perform projections to inform conversion rate and amounts.
Additional variables that can influence a retirement decision include health care costs, investment performance and inflation. Although these variables cannot be predicted with certainty, making educated guesses about their future values ​​can help you plan effectively. For professional guidance, this free tool can help you match with a fiduciary financial advisor.
Ultimately, $2.5 million could reasonably support retirement at age 60 if assumptions about withdrawal rates, taxes, health care costs and other factors hold. Being flexible on spending and having some income options as a potential backup provides wiggle room in case things don’t go exactly as expected. It’s wise to work with a financial advisor to stress-test a plan’s feasibility under different market and lifespan scenarios to ensure the savings stand the test of time.
Despite your planning efforts, some uncertainties and risks remain when deciding if and when to retire. Prolonged periods of high inflation can erode purchasing power more quickly, or health problems can also increase costs, especially those who retire early before becoming eligible for Medicare at age 65. To counter budget risks, retirees need to build in some margin, for example by having income streams that go beyond their portfolio withdrawals.
While $2.5 million doesn’t guarantee a safe retirement at age 60, it does provide more options than some retirees might have. Weighing complex projections around taxes, health care costs, withdrawal rates and Social Security compromises could determine next steps. Because no plan survives first contact with reality perfectly, working with an advisor and maintaining some flexibility helps retirees make audible noises while protecting their savings.
While you can’t know exactly what will happen when you retire, SmartAsset’s retirement calculator can help you make a reasonable estimate of who is well prepared.
A financial advisor can help you stress test your retirement plan across lifetime, market and tax scenarios to assess its viability. 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.
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