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Although one could argue that the cultural retirement age is 65, and Social Security retirement age is 67, many households want to cross the finish line a little bit early. But 62 is the earliest you can begin to take Social Security. It’s also not that far in advance of the normal retirement age, so even if you don’t take benefits this is a good age to start thinking about retirement.
For example, say that you’re 62 and have $1.3 million saved up in an IRA. You expect to collect $2,800 per month ($33,600 per year) in full Social Security benefits. Can you retire?
The answer is, probably. As always, this depends significantly on your lifestyle and needs. This profile suggests (based on your benefits) that your income is approximately $100,000 per year. Using the 80% rule, this means we’re looking for about $80,000 per year of retirement income. Based on this, you should be able to afford to retire now. But you’ll want to think through your plan before you make anything official.
Here are some things to think about. You should also consider using this free tool to match with a financial advisor for professional guidance.
One of the first questions with early retirement is always when to take Social Security.
You can begin taking full benefits at age 67. If you delay taking benefits after this, you will increase your lifetime payments for each year that you wait. The maximum benefits you can collect are 124% of your base benefits starting at age 70.
You can also take Social Security benefits earlier than 67, but you will reduce your lifetime payments by each month that you take benefits early. The earliest you can collect benefits is age 62, when you will receive 70% of your base benefits. Again, this is a lifetime reduction.
This is a sliding scale. For example, you will receive 108% of your benefits if you start taking them at age 68. However, for ease of example, we will consider three basic tiers:
Earliest Social Security at 62: $1,960 per month (70% of $2,800)
Full Social Security at 67: $2,800 per month
Maximum Social Security at 70: $3,472 per month (124% of $2,800)
The balance here is that the longer you wait to take Social Security, the more you will likely have to draw on your IRA to replace that income. This will reduce your overall principal. However, in trade, the longer you wait the higher your lifetime benefits will be. For comparison, let’s assume a retirement until age 95 (33 years). Here is how much money you would withdraw from your IRA to generate an $80,000 annual income, based on taking benefits at age 62, 67 and 70. (Don’t worry that this is a lot more than $1.3 million, we’ll address returns in a moment.)
At age 62:
Annual income: Benefits $23,520 per year, IRA withdrawals $56,480 per year
Total IRA withdrawals by age 95: $1,863,840 ($56,480 * 33)
At age 67
Annual income until age 67: IRA withdrawals $400,000 ($80,000 * 5)
After age 67 Annual Income: Benefits $33,600 per year, IRA withdrawals $46,400
Total IRA withdrawals by age 95: $1,699,200 ($46,400 * 28 + $400,000)
At age 70
Annual income until age 70: IRA withdrawals $640,000 ($80,000*8)
After age 70 Annual Income: Benefits $41,664, IRA withdrawals $38,336
Total IRA withdrawals by age 95: $1,598,400 ($41,664*25 + $640,000)
Now, these numbers do 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 in place to grow. But the up front math is that you will spend less from your IRA in the long run if you delay taking benefits.
The next biggest issue is portfolio management. In retirement, households typically shift their assets from the equity-heavy growth model of their working years to a bond- and depository-heavy security model. In general, this means shifting from pursuing returns between 8% to 11% (the average annual returns of a mixed-asset portfolio and the S&P 500, respectively) to pursuing growth rates between 5% and 8% (the average annual returns of Aaa-rated corporate bonds and a mixed-asset portfolio, respectively).
How much growth you pursue will depend heavily on your ability to manage risk. Risk management is a question of how you will handle losses in your portfolio. During your working years, risk management is largely handled by leaving your portfolio alone and dollar-cost-averaging your investment contributions. Invest for the long term and leave your assets in place if your investment thesis holds for the long-term. In retirement, you don’t always have that luxury since you need to take this money out for income.
Instead, you need to manage risk by considering what you would do if a given investment takes losses. If at all possible, you will want to avoid having to sell assets during a down year or, even worse, at a loss. If you can adjust to bad markets, for example by spending less or by tapping other resources for income, then you can afford to invest more aggressively for growth. If you will need to rely on this IRA regardless of the economic conditions, then you will want to invest more conservatively.
Here’s where we have some good news. Even if we take a conservative approach and put this entire IRA into corporate bonds seeking an average 5% interest rate, this portfolio comfortably exceeds your income needs. An all-bond portfolio generating 5% interest would generate $133,250 per year in interest payments without even needing to draw down on the principal. ($1.3 million * 0.05) With full Social Security benefits, this could generate about $166,850 per year in combined income.
Now, the portfolio income from bond yields would not be inflation-adjusted. You would need to reinvest some of this income for growth in order to offset the erosion of inflation, otherwise within 30 years or so this portfolio would have the equivalent spending power of about $67,000 today. However, this should be a solvable problem.
A financial advisor can help you determine appropriate investment assets.
The final note here 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 this money. For example, take the $133,250 generated by a bond portfolio. After federal taxes this would generate about $111,732 in spendable income (less state and local taxes).
If you do convert to a Roth IRA you can generally avoid tax issues in retirement, including RMDs, but you will need to pay the considerable conversion taxes associated with this move. For example, say that you convert your IRA 10% at a time over 10 years. You would pay about a cumulative $270,000 in federal taxes on these transfers at current rates, not including taxes on any growth over that time or other taxable income you may have in those years. That doesn’t mean it’s necessarily a bad idea, just make sure to run the numbers first.
Finally, make sure to keep an eye on your RMDs.
Required Minimum Distributions (RMDs) require you to withdraw a minimum amount from each of your pre-tax portfolios each year starting at age 73 (age 75 starting in 2033). This is a tax rule designed to make sure that you eventually pay some money on your retirement portfolios. The exact amount you must take is based on the portfolio’s value and your age.
For most households, RMDs are a technical rule that rarely comes up in practice. The required withdrawal is typically smaller than the amount most people withdraw for their income. However in this case, especially if you take Social Security benefits at age 70, your income needs might actually fall below the RMD requirements. For example, say that your portfolio is still worth $1.3 million at age 73. Your RMD requirement would be $49,056. This is less than you would need to take from your portfolio to hit your income needs. So make sure you stay on top of your annual RMD requirements. You don’t want these to sneak up on you.
Ultimately, everyone’s financial profile and goals are unique. Consider speaking with a fiduciary financial advisor about building and executing a plan based on your circumstances.
With $1.3 million in the bank, can you afford to retire at age 62? It depends on your spending needs, but this kind of money can actually generate a fairly comfortable, stable income, even if you decide to retire early. You will need a plan for taxes and inflation, but this might well be worth discussing with your financial advisor.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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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