A 62-year-old pensioner smiles as his dog jumps on his back.
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Let's say you have $1 million Roth IRA and receive $2,250 a month from Social Security when you become eligible for benefits. Will that be enough for you to retire at 62?
The answer to that question may be yes, but it may require you to live on a tighter budget than you'd like in retirement. You can even outlive your savings depending on how you manage your assets. If you have important reasons to retire at age 62, this may not be a deal breaker, but it may be a reason for you to wait until your full retirement age.
In this scenario, you can expect to live on about $67,000 a year, or about $5,583 a month. This will consist of $2,250 from Social Security, and the rest will be withdrawn from the Roth IRA using the 4% rule each year.
Kevin Caldwell, CFPschool principal Golden Road ConsultantsBe warned that there are many important unknowns in this type of retirement package when it comes to your income. For example, are you married? What state or city do you live in and how does that affect your taxes and other major expenses? How do you expect the cost of living to rise and what is your life expectancy? These details really matter.
Fortunately, this situation has already been handled in one detail. With a Roth IRA, you've largely cut taxes out of the picture. This will significantly increase your effective income.
"The math is easier," Caldwell said. "Essentially, neither is taxed."
With a 4% direct withdrawal from a Roth IRA and only 50% of your Social Security contributions being taxed, your taxable income is even lower than an individual deduction. The net result is still not very high compared to your pre-retirement income.
Taking $2,250 in Social Security benefits at age 62 means you're close to maxing out your credit over the course of your working life. There's a good chance you're making around six figures right now, which will make $67,000 a year a significant cut. But in many parts of the country, that's a livable income, but doesn't allow for large discretionary spending. For more help figuring out how much income you'll need in retirement, consider agree with a financial advisor.
A woman ponders her finances at age 62 as she wonders if she can afford to retire.
Alex Ingrim, Financial Advisor Chase Buchanandetails how many of his clients have retired with similar financial situations. While this is certainly possible, it requires strict control over your spending. This is especially true after accounting for factors such as health care, insurance, housing, and inflation.
"My biggest concern is whether anyone can stick to that budget and whether they (in many locations) will retire early on a smaller budget," Ingrim said.
This creates two problems. First, living past the age of 90 today is not unreasonable. On this budget, you can outlive your savings. A financial advisor help you estimate how long your savings will last.
Second, maintaining a disciplined budget is neither easy nor fun, and this is doubly true for married couples. This is where Ingrim is most concerned.
“Retirement is a significant transition for many people, and it helps to make the process comfortable, both psychologically and financially. Worrying about the budget every month is not going to help during the transition,” he said. "There's not much room for error in this scenario."
Retiring at age 62 can significantly reduce your potential income and make it less likely that you will have any money left over. Caldwell calculated the plan's success rate — retiring at age 62 with a $1 million Roth IRA — and ran the numbers twice: once if you start collecting Social Security at age 62, and another at age 67.
"If you get a 62 in Social Security, 78 percent of the plan is covered," he said. "At age 67, it works 86% of the time."
Remember to take Social Security at age 62 reduces increase your lifetime benefits by up to 30%. But if you wait until full retirement age, or 67 for those born in 1960 or later, you'll be collecting more than $3,000 a month.
The same goes for your Roth IRA. Delaying retirement until age 67 gives your Roth IRA time to grow tax-free. If you keep your investments in a standard 60/40 portfolio Average annual return of 8.7%, according to Vanguardyour Roth IRA can be worth $1.5 million by age 67.
If you follow the 4% rule, you can withdraw $60,000 annually from a Roth IRA in this scenario. With increased Social Security benefits, your retirement income will be about $96,000 a year, providing a more comfortable lifestyle than if you retired at age 62.
A woman goes over her retirement income plan with her financial advisor.
Yes, you can 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 on a more limited retirement than you'd like. A better alternative may be to wait until retirement age, build up your portfolio and benefits, and then retire in style.
A financial advisor Helping you create a comprehensive retirement plan. Finding a financial advisor doesn't have to be difficult. Free tool from SmartAsset matches you with three vetted financial advisors in your area, and you can schedule a free introductory call with your advisor to decide which one is right for you. If you're ready to find an advisor to help you achieve your financial goals, start now.
Tax plays an important role in retirement income planning. By handling federal income taxes early, your Roth IRA can effectively increase your retirement income. Here's a closer look How Roth IRAs compare to traditional IRAs.
Keep an emergency fund handy in case of unexpected expenses. An emergency fund should be liquid in an account that is not subject to significant volatility like the stock market. Inflation can reduce the value of liquid cash. But high-interest accounts allow you to earn compound interest. Compare the savings accounts of these banks.
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