Suppose you have $1 million in a Roth IRA and will receive $2,250 each month from Social Security when you become eligible for benefits. Would this be enough to allow you to retire at age 62?
The answer to that question could be yes, but there’s a chance it may require you to live on a tighter budget in retirement than you might want. Even then, you could outlive your savings depending on how you manage your assets. That may not be a deal-breaker if you have an important reason to retire at 62, but it’s a potential reason to consider waiting until full retirement age, if that’s an option for you.
Do you have questions about saving for retirement and building an income plan? Speak with a financial advisor today.
A Manageable, But Tight Income
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 withdrawing the rest from your Roth IRA using the 4% rule annually.
Kevin Caldwell, CFP, a principal at Golden Road Advisors, cautions that when it comes to your income, there are many important unknowns in this kind of retirement portfolio. Are you married, for example? What state and city do you live in, and how will that affect your taxes and other major expenses? What costs of living increases do you expect, and what is your life expectancy? These details really matter.
Fortunately, though, this situation already has one detail managed. With a Roth IRA, you have largely taken taxes out of the picture. This will boost your effective income considerably.
“The math is easier,” said Caldwell. “Basically no taxes on any of it.”
With a straight 4% 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, particularly compared with your likely income pre-retirement.
To receive $2,250 in Social Security benefits at age 62 means you came close to maximizing your credits during your working life. The odds are good that you would have an income around six figures right now, which would make $67,000 per year a significant step down. But in many areas of the country, it’s a liveable income, albeit one that may not allow for a lot of discretionary spending. If you need more help estimating how much income you’ll need in retirement, consider matching with a financial advisor.
The Biggest Risk Is Your Budget
Alex Ingrim, a financial advisor at Chase Buchanan, details how many of his clients have retired with similar financial situations. While it’s certainly possible, it requires keeping your spending tight. This is particularly true after accounting for factors like health care, insurance, housing, inflation and more.
“My greatest concern would be whether someone can stick to this budget, and whether they would actually enjoy early retirement on a shoestring budget (for many locations),” Ingrim said.
This raises two concerns. First, it’s not unreasonable to live past 90 years old today. On this budget, you may foreseeably outlive your savings. A financial advisor can help you estimate just how long your savings may last.
Second, it’s neither easy, nor fun to stick to a disciplined budget, and that’s doubly true for a married couple. This is where Ingrim is most concerned.
“Retirement is a significant transition for many people, and it helps to feel comfortable with the process, both psychologically and financially. It doesn’t help the transition to be worried about your budget month in and month out,” he said. “There isn’t a large margin for error in this scenario.”
An Alternative Approach
By retiring at 62, you may significantly reduce your potential income, and with it, the likelihood that your money lasts. When Caldwell calculated the success rate of this plan – retiring at 62 with $1 million in a Roth IRA – he ran the numbers twice: once if you start collecting Social Security at age 62 and another if you claim at age 67.
“If Social Security is taken at 62, the plan works 78% of the time,” he said. “At age 67, it works 86% of the time.”
Remember, collecting 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 collect over $3,000 per month.
The same is true of your Roth IRA. Delaying retirement until age 67 would also give your Roth IRA more time to grow tax-free. If you keep your investments in a standard 60/40 portfolio with an average 8.7% annual return, according to Vanguard, your Roth IRA could be worth up to $1.5 million by age 67.
If you follow the 4% rule, you could afford to withdraw $60,000 annually from your Roth IRA in this scenario. Adding in your increased Social Security benefits would boost your retirement income to around $96,000 per year, affording you a significantly more comfortable lifestyle compared to retiring at 62.
Bottom Line
Yes, you could potentially retire early at 62 with $1 million in a Roth IRA and $2,250 in monthly Social Security benefits. But you may need to restrict your spending and live a more limited retirement than you may want to. A better alternative may be to wait until full retirement age, let your portfolio and benefits finish growing, and then retire in some style.
Retirement Planning Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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 handling federal income taxes early, your Roth IRA effectively boosts your retirement income considerably. Here’s a closer look at how Roth IRAs stack up against traditional IRAs.
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