A 62-year-old retiree smiles as her dog jumps on her back.
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Suppose you have a million dollars in… Roth IRA You’ll receive $2,250 a month from Social Security when you become eligible for benefits. Will this be enough to allow you to retire at age 62?
The answer to this question could be yes, but there is a possibility that it will require you to live on a smaller budget in retirement than you might want. Even then, your savings can outlast you depending on how you manage your assets. This may not be a deal-breaker if you have an important reason to retire at 62, but it is a potential reason to consider waiting until full retirement age, if that’s an option for you.
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 This consists of $2,250 from Social Security, with the rest withdrawn from your Roth IRA using the 4% per year rule.
kevin caldwell, CFPthe school principal in Golden Way Consultantswarns that when it comes to your income, there are many important unknowns in this type of retirement portfolio. For example, are you married? What state and city do you live in, and how will that affect your taxes and other major expenses? What do your costs of living expect to increase, and what is your life expectancy? These details are really important.
But fortunately, this situation has already been managed with one detail. With a Roth IRA, you pretty much take taxes out of the picture. This would greatly enhance your effective income.
“The math is easier,” Caldwell said. “Basically there are no taxes on any of it.”
With a 4% direct withdrawal from your Roth IRA and only a 50% tax from your Social Security, your taxable income is even less than the standard deduction for a single filer. The net result still isn’t incredibly high, especially compared to your potential pre-retirement income.
Getting $2,250 in Social Security benefits at age 62 means you’re close to maximizing your credits over your working life. Chances are good that your income is around six figures right now, making $67,000 a year a big step down. But in many areas of the country, this is a livable income, albeit one that may not allow for much discretionary spending. If you need more help estimating how much income you’ll need in retirement, consider this Matching with a financial advisor.
A woman monitors her finances and wonders if she will be able to retire at 62.
Alex Ingrim, Financial Advisor at Chase Buchanandetails the number of his clients who have retired with similar financial situations. Although this is certainly possible, it requires keeping your spending limited. This is especially true after taking into account factors such as health care, insurance, housing, inflation, and more.
“My biggest concern is whether someone can stick to that budget, and whether they will actually enjoy early retirement on a shoestring budget (for a lot of locations),” Ingrim said.
This raises two concerns. First, it is not unreasonable that we live more than 90 years today. With this budget, you may predictably exceed your savings. A Financial advisor It can help you estimate how long your savings might last.
Second, it’s not easy or fun to stick to a disciplined budget, and this is doubly true for a married couple. This is where Ingrim is most concerned.
“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 to worry about your budget month to month,” he said. “There’s not a lot of margin for error in this scenario.”
By retiring at 62, you may significantly reduce your income potential, and with it the potential for your money to last. When Caldwell calculated the success rate of this plan — retiring at 62 with $1 million in a Roth IRA — he checked the numbers twice: once if you start collecting Social Security at 62 and again if you claim it at 67.
“If Social Security is taken at age 62, the plan works 78 percent of the time,” he said. “At 67, he works 86% of the time.”
Remember, collect Social Security at age 62 reduces Your life benefits of up to 30%. But if you wait until full retirement age — 67 for people born in 1960 or later — you’ll collect more than $3,000 a month.
The same goes for 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 worth… The average annual return is 8.7%, according to VanguardYour Roth IRA can be worth up to $1.5 million by age 67.
If you followed the 4% rule, you could withdraw $60,000 per year from your Roth IRA in this scenario. Adding your increased Social Security benefits would boost your retirement income to about $96,000 per year, providing you with a more comfortable lifestyle compared to retiring at age 62.
A woman reviews her retirement income plan with her financial advisor.
Yes, you can probably retire early at age 62 with $1 million in a Roth IRA and $2,250 a month in Social Security benefits. But you may need to restrict your spending and live for a more limited retirement than you might like. A better alternative may be to wait until full retirement age, let your portfolio and benefits finish growing, and then retire in some style.
A Financial advisor It can help you build a comprehensive retirement plan. Finding a financial advisor is not difficult. Free SmartAsset tool Matches you with up to three vetted financial advisors serving your area, and you can set up a free introductory call with your matched advisors to determine which advisor you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.
Taxes It plays an important role in retirement income planning. By handling your federal income taxes early, your Roth IRA effectively boosts your retirement income significantly. Here’s a closer look About how Roth IRAs stack up against traditional IRAs.
Keep 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 such as the stock market. The trade-off 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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