For many people, early retirement means 62. This is the age they can start withdrawing money from their retirement accounts and receive Social Security. For example, let’s assume an individual with $425,000 in a Roth IRA, a $1,000 monthly pension, and expect $1,600 in Social Security. Is it going to be enough?
As often in retirement, the answer depends on your spending, goals and other factors. With this profile, you can probably anticipate an income between around $44,000 and $60,000 per year. This might be enough to make ends meet, but it will be a pretty tight budget for most people. You can retire if you need to, but you’ll set yourself up more comfortably if you wait.
Here are some factors to consider. Remember, everyone’s situation is unique, and these examples are simplified to illustrate points. Consider consulting a fiduciary financial advisor for personal and professional advice.
Financially, there are several important issues to retiring at 62.
While 62 is the earliest you can begin collecting Social Security benefits, full retirement age is set at 67. You receive reduced benefits for each month that you begin collecting benefits early, down to 70% of your full benefits if you retire at 62. This is a lifetime reduction in payments.
Here, you expect to receive $1,600 per month at age 62, or $19,200 per year. This means your full benefits at age 67 would be $2,285 per month, or $27,428 per year ($1,600/0.7). You could also collect increased benefits by waiting, with a maximum of $2,924 per month, or $35,098 per year ($2,285 * 1.28) at age 70.
You cannot enroll in Medicare until age 65. This means that you will need to cover your own basic medical expenses for the first three years of retirement. If you have an employer with benefits, you must account for the new costs of private insurance. If not, you must anticipate ongoing insurance expenses.
This is in addition to the costs of gap and long-term care insurance common to all retirees. A financial advisor can help you navigate Medicare and Social Security.
By retiring at 62, rather than 67, you will need to budget for five more years of retirement. It’s essential to remember that this is both five more years of income and five fewer years of savings and growth.
For example, say that you have your $425,000 Roth IRA invested in a portfolio returning 8% each year. You invest $7,500 per year (10% of an average $75,000 per year income). At age 67, you might have $668,464 in your Roth IRA.
Then, retiring at age 62 means accounting for five more years of spending and portfolio income, with the additional inflation that this will entail. Make sure that you budget for these additional costs.
This is the place to start. Given your savings and benefits, what will your retirement income be? This will depend in part on how you choose to manage your money and benefits.
Take our basic assumptions. You have $2,600 per month in combined Social Security and pension payments, or $31,200 per year in guaranteed income.
Then there’s your portfolio income. One rule of thumb for estimating portfolio income is called the 4% rule. You plan on investing conservatively and withdrawing 4% of your portfolio each year, generating 25 years of inflation-adjusted income starting at age 67. Let’s say we adjust this rule for the five years of additional retirement. In that case, we assume a 3.33% withdrawal of your Roth IRA (100% / 30). That would generate $14,025 per year of inflation-adjusted income ($425,000 *0.033).
With this profile, you might expect about $45,225 per year of combined income between portfolio, benefits and pension.
This is just a set of starting assumptions though. There are many ways to adjust your anticipated income based on financial planning. In fact many financial advisors think that the 4% rule may be too conservative these days.
For example, say that instead of an adjusted 4% rule you invest entirely in corporate bonds paying a standard 5% interest rate. This might generate around $30,000 per year of inflation-adjusted portfolio income for more than 30 years. With this profile, you might expect around $61,200 per year of combined income.
Or you might also choose to adjust your plan around Social Security, increasing portfolio withdrawals in early retirement so you can delay taking benefits until age 67 or later. This would boost your lifetime benefits, but at the expense of reduced portfolio principal. Or you might more heavily in stocks, seeking an 8% average return. This might generate almost $40,000 per year of portfolio income, $71,200 of combined income, but at the expense of significantly more risk and volatility in your retirement income.
The point is that you can make some basic assumptions, but ultimately your retirement income will depend significantly on your financial plan. A financial advisor can help you make more detailed projections based on your own assumptions.
Let’s assume that you take a bond-focused approach. You invest for 5%, corporate bond returns, and you expect a combined income of around $61,000 per year. That’s the money coming in the door.
The next question is, what’s the money going out? Because this is the balance. If your after-tax income beats your spending and lifestyle needs, then you can retire. If not, then you should continue to work and save.
Here, the post-tax Roth IRA will do a lot of work for you. You won’t pay taxes on this portfolio income and it won’t contribute to your taxable income for pension and benefit income. In fact, with this profile your taxes will be minimal. While a full analysis of benefit taxes is beyond the scope of this article, with $19,200 per year of Social Security and $12,000 per year of pension income you will likely pay very little in federal taxes on this money. So we can assume an after-tax income of between $44,000 and $60,000.
The next question is whether this will meet your needs. To answer this question, take a close look at both current and anticipated spending. What do you spend on housing, utilities, insurance and other monthly bills? What new insurance bills will you pick up by retiring at 62? What do you spend each month on food, entertainment, consumer goods and other general spending? Do you live in an area with particularly high inflation, and do you rent your home (exposing yourself to housing inflation)? Do you have any significant debt? Together, these factors and more will make up your retirement spending budget.
One rule of thumb is that you should aim for a retirement income worth about 80% of your pre-retirement income. This is generally considered what you will need to comfortably maintain your lifestyle. Consider matching with a financial advisor if you need help building an efficient retirement strategy.
The answer to whether you can retire at 62 will depend entirely on your personal circumstances. If you live someplace inexpensive, like a small, rural town, then even $44,000 per year might be enough to live comfortably. If you live in a big city, however, even $60,000 might not work.
In general, you will probably have a much more comfortable retirement if you wait. In any part of the country, between $44,000 and $60,000 can be livable, but it is not a generous income.
On the other hand, take our numbers above. Say that you wait until age 67. You will receive full Social Security and your portfolio will have five more years of maximum growth. You could, with some reasonable assumptions, retire with $2,285 per month in Social Security, $1,000 per month in a pension and $668,464 in your Roth IRA. With a 5% bond portfolio, that might generate around $45,000 of portfolio income, plus $39,420 of benefits and pension income, for an inflation-adjusted income of around $84,420 per year. This is enough to be comfortable almost anywhere.
You can probably retire right now if you need to, although it might require relocating based on where you live. But you’ll probably be a lot more comfortable if you wait.
Early retirement requires balancing a number of assumptions. Your costs will go up to account for a longer retirement and health insurance. You will also have less time to invest and grow your money. For many households, just a few more years of waiting can mean the difference between paying the bills and living comfortably.
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.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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