SmartAsset and Yahoo Finance LLC may earn commissions or revenue through links provided in the content below.
While it is arguable that the cultural retirement age is 65 and the Social Security retirement age is 67, many households prefer to cross the finish line a little earlier. But age 62 is the earliest you can start taking Social Security. It’s also not that far away from normal retirement age, so even if you’re not on benefits, it’s a good age to start thinking about retirement.
For example, say you’re 62 years old and have $1.3 million in savings. USD IRA. You expect to collect $2,800 per month ($33,600 per year) in total Social Security benefits. Can you retire?
The answer is, probably. As always, it really depends on your lifestyle and needs. This profile indicates (based on your benefits) that your income is approximately $100,000 per year. Using the 80% rule, that means we’re looking at roughly $80,000 a year in retirement. With that in mind, you should be able to afford to retire now. But before you officially announce anything, you’ll want to think carefully about your plan.
Here are some things to think about. You should also consider using this free tool to connect with a financial advisor for professional advice.
One of the first questions about early retirement is always when to take Social Security.
You can start taking full benefits at age 67. If you delay taking benefits after that, you will increase your lifetime benefits for each year you wait. The maximum benefits you can receive are 124% of your basic benefit from age 70.
You can also take Social Security benefits before age 67, but each month you take your benefits earlier will reduce your lifetime benefits. The earliest you can receive benefits is at age 62, when you receive 70% of your base benefits. Again, this is a lifetime reduction.
This is a sliding scale. For example, you’ll get 108% of your benefits if you start taking them at age 68. However, to make it easier, we will consider three main stages:
-
First Social Security at age 62: $1,960 per month (70% of $2,800)
-
Full Social Security 67: $2,800 per month
-
Maximum Social Security at age 70: $3,472 per month (124% of $2,800)
The balance is that the longer you wait to receive Social Security, the more likely you will need to tap into your IRA to replace that income. This will reduce the total. But in trading, the longer you wait, the greater your lifetime benefit. For comparison, let’s say you retire before age 95 (33 years). Here’s how much money you’d take out of your IRA to get $80,000 in annual income, based on withdrawals at ages 62, 67, and 70. (Don’t worry it’s a lot more than $1.3 million, we’ll get to the returns in a moment.)
At age 62:
-
Annual Income: Withdrawal $23,520 per year, IRA withdrawals $56,480 per year
-
Total IRA withdrawals before age 95: $1,863,840 ($56,480 * $33)
At the age of 67
-
Annual income before age 67: IRA withdrawals of $400,000 ($80,000 * 5)
-
At age 67 Annual income: $33,600 per year IRA withdrawals $46,400
-
Total IRA withdrawal at age 95: $1,699,200 ($46,400 * 28 + $400,000)
At the age of 70
-
Annual income before age 70: IRA withdrawals $640,000 ($80,000 * 8)
-
At age 70 Annual income: withdrawals $41,664, IRA withdrawals $38,336
-
Total IRA withdrawal at age 95: $1,598,400 ($41,664 * $25 + $640,000)
Now, these numbers change based on your personal life expectancy. It will also change based on your investment strategy. Depending on how you manage your IRA, you may choose to prioritize leaving more money for growth. But the basic math is that you’ll spend less from your IRA in the long run if you delay taking withdrawals.
Consider talking to a financial advisor to help weigh the tradeoffs.
The next biggest issue is portfolio management. In retirement, households typically shift their wealth from a high capital growth model during their working years to a bond and depository security model. In general, this means moving from a return of 8% to 11% (the average annual return of the mixed asset portfolio and the S&P 500, respectively) to a growth rate of 5% to 8% (the average annual return of the Aaa-rated corporate bond and the mixed asset portfolio, respectively).
How much you grow will largely depend on your ability to manage risk. Risk management is a matter of how you will manage losses in your portfolio. During your working years, risk management is largely handled by keeping your portfolio separate and averaging your investment contributions. Invest for the long term and leave your assets if your investment work is valid for a long time. You don’t always have that luxury in retirement because you have to take this money for income.
Instead, you need to manage risk by thinking about what you would do if a certain investment suffered a loss. If possible, avoid having to sell the property in a down year or worse, at a loss. If you can adapt to bad markets, such as by spending less or using other resources to generate income, you can afford to invest more aggressively for growth. If you will need to rely on this IRA regardless of economic conditions, then you will want to invest more conservatively.
That’s where we have the good news. Even if we take a conservative approach and put this entire IRA in corporate bonds, aiming for an average interest rate of 5%, this portfolio will comfortably exceed your income needs. An entire bond portfolio generating 5% interest would pay $133,250 in interest per year without even having to deduct the principal. ($1.3 million * 0.05) With all Social Security benefits, the total income would be about $166,850 per year.
Now, the portfolio’s income from bond yields would not be adjusted for inflation. You would have to reinvest some of that income for growth to offset the erosion of inflation, otherwise, in about 30 years, the spending power of this portfolio would be equivalent to about $67,000 today. However, this should be a solvable problem.
A financial advisor can help you identify the right investment property.
A final note is to consider your tax issues.
First, always remember that retirement income is still income. Unless you convert your money to a Roth IRA, you will have to pay income taxes on that money. For example, take the $133,250 generated by the bond portfolio. After federal taxes, this would generate about $111,732 in spent revenue (minus state and local taxes).
If you convert to a Roth IRA, you can generally avoid tax issues in retirement, including RMDs, but you’ll have to pay the high conversion fees associated with this move. For example, let’s say you convert 10% of your IRA at one time over 10 years. You’d pay about $270,000 in federal taxes on those transfers at current rates, not including taxes on any growth during that time or other taxable income you might have that year. That doesn’t mean it’s necessarily a bad idea, just run the numbers first.
Finally, be sure to keep track of your RMDs.
Required minimum distributions (RMDs) require you to withdraw a minimum amount from each pre-tax portfolio each year starting at age 73 (age 75 starting in 2033). This is a tax rule designed to ensure that you end up paying some money out of your retirement portfolios. The exact amount you need to take out depends on the value of the portfolio and your age.
In most households, the RMD is a technical rule that rarely occurs in practice. The required withdrawal is usually less than what most people withdraw for their income. However, in this case, especially if you receive Social Security benefits after age 70, your income needs may actually be less than the RMD requirements. For example, let’s say your portfolio is still worth $1.3 million. USD when you are 73 years old. Your RMD requirement would be $49,056. This is less than you would need to take out of your portfolio to meet your income needs. So make sure you meet the annual RMD requirements. You don’t want it to get to you.
Ultimately, everyone’s financial profile and goals are unique. Consider speaking with a trusted financial advisor about creating and implementing a plan based on your circumstances.
With $1.3 million in the bank, can you afford to retire at 62? It depends on your spending needs, but that kind of money can actually generate a pretty comfortable and stable income, even if you decide to retire early. You will need a tax and inflation plan, but this may be worth discussing with your financial advisor.
-
Even if you can’t fully retire early, there are still plenty of ways to start scaling back your working life. We call it semi-retirement, and here’s how you can use it to start relaxing long before you turn 67.
-
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool will match you with verified financial advisors who serve 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 who can help you achieve your financial goals, get started now.
-
Have an emergency fund in case of unexpected expenses. An emergency fund should be liquid, in an account that is not exposed to significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. However, a high-interest account allows you to earn compound interest. Compare the savings accounts of these banks.
-
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time on conversions. Learn more about SmartAsset AMP.
Photo credit: ©iStock.com/triloks
The post I have saved 1.3 million. $ and I’ll collect $2,800 a month for Social Security. Can I retire at 62? appeared first on SmartAsset SmartReads.
