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Although one could argue that the traditional retirement age is 65, and the Social Security retirement age is 67, many households want to cross the finish line a little earlier. But at 62, you can start collecting Social Security. It’s also not that far before normal retirement age, so even if you’re not taking benefits, this is a good age to start thinking about retirement.
For example, say you’re 62 years old and have $1.3 million in an IRA. You can expect to collect $2,800 a month ($33,600 a year) in full Social Security benefits. Can you retire?
The answer is probably. As always, this depends a lot on your lifestyle and needs. This profile He points out (Depending on your benefits) Your income is approximately $100,000 per year. Using the 80% rule, that means we are. look at Retirement income of about $80,000 per year. Accordingly, you should be able to retire now. But before you make anything public, you’ll want to think about your plan.
Here are some things to consider. You should also consider using it This is a 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 start receiving full benefits at age 67. If you delay taking benefits after that, payments will increase for each year you wait. The maximum benefit you can collect is 124% of the basic benefit from age 70.
You can also start taking Social Security benefits before 67, but your lifetime payments will be reduced for each month you take benefits earlier. You can collect the first benefit at age 62, when you get 70% of the basic benefit. Again, this is a reduction in life expectancy.
This is a sliding scale. For example, if you start taking it at age 68, you’ll get 108% of the benefits.
First 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 likely you’ll need to draw on an IRA to replace that income. This will reduce your total principal. But, in business, the longer you wait, the higher your lifetime benefits will be. For comparison, let’s retire until 95 (33 years). Here’s how much money you’ll need to withdraw from an IRA to generate $80,000 in annual income, based on benefits at ages 62, 67, and 70. (Don’t worry if that’s over $1.3 million, we’ll cover the returns in a moment.)
At the age of 62:
Annual Income: Benefits $23,520 per year, IRA withdrawals $56,480 per year
Total IRA funds at age 95: $1,863,840 ($56,480 * 33)
At the age of 67
Annual income until age 67: IRA withdrawal $400,000 ($80,000 * 5)
Annual income after age 67: Benefits $33,600 a year, IRA withdrawals $46,400
Total IRA funds at age 95: $1,699,200 ($46,400 * 28 + $400,000)
At the age of 70
Annual income through age 70: IRA withdrawal $640,000 ($80,000*8)
Annual income after age 70: Benefits $41,664, IRA withdrawals $38,336
Total IRA withdrawals at age 95: $1,598,400 (41,664*25+$640,000)
Now, these numbers will change based on your personal life expectancy. It also changes based on your investment strategy. Depending on how you manage your IRA, you can prioritize leaving more money in place for growth. But if you delay benefits up front, you’ll end up spending less on your IRA over the long term.
The next biggest issue is portfolio management. In retirement, households shift their assets from the equity-heavy growth model of their working years to a bond and deposit-heavy security model. Generally, this means going from tracking returns of 8% to 11% (average annual returns of a mixed asset portfolio and the S&P 500, respectively) to tracking growth rates between 5% and 8% (average annual returns of AAA-rated corporate bonds and a mixed asset portfolio). respectively).
How much you continue to grow depends a lot on your ability to manage risk. Risk management is a question of how you handle losses in your portfolio. During your working years, risk management is mostly handled by leaving your portfolio alone and dollar cost averaging your investment contributions. If your investment theory is long-term, invest long-term and leave your assets in place. In retirement, you won’t always have that luxury as you will need to withdraw this money for income.
Instead, you should manage risk by thinking about what to do if a given investment results in a loss. If possible, you want to avoid selling assets during the year, or at worst, avoid bankruptcy. If you can adapt to bad markets, for example by spending less or tapping other resources for income, you can invest more aggressively for growth. Regardless of the economic situation, if you need to rely on this IRA, you’ll want to invest more carefully.
Here we have good news. Even if we take a conservative approach and invest this entire IRA in corporate bonds seeking an average interest rate of 5%, this portfolio will comfortably It is greater Your income needs. An all-bond portfolio would generate 5% interest for $133,250 a year without having to make interest payments on principal. (1.3 million * 0.05) With full Social Security benefits, this would result in a gross income of $166,850 per year.
Now, portfolio income from bond products will not be adjusted for inflation. To offset the erosion of inflation, you must invest some of this income for growth, otherwise, in 30 years or so, this portfolio will have the equivalent spending power of $67,000 today. However, this should be a solvable problem.
A Financial advisor It can help you determine suitable investment properties.
The last note here is to consider your tax issues.
First, always remember that retirement income is still income. Unless you convert your money into a Roth IRA, you will have to pay income tax on that money. For example, take the $133,250 generated by the bond portfolio. That would be after federal taxes. generate With disposable income (less state and local taxes) of about $111,732.
If you convert to a Roth IRA, you can generally avoid tax issues in retirement, including RMDs, but you will need to pay higher conversion taxes associated with this move. For example, say you rolled over 10% of your IRA at a time over 10 years. At current rates, you will pay about $270,000 in federal taxes on these transfers. That doesn’t necessarily mean it’s a bad idea, just make sure you run the numbers first.
Finally, be sure to track your RMDs.
Required minimum distributions (RMDs) require you to withdraw a minimum amount from each pre-tax portfolio each year starting at age 73 (75 starting in 2033). This is a tax law designed to ensure that you ultimately pay some money into your retirement portfolios. The exact amount you should take depends on the value of the portfolio and your age.
For most households, RMDs are a technical rule that rarely comes into play. Required spending is less than most people spend on their income. However, in this case, especially if you take Social Security benefits at age 70, your income needs may fall below the RMD requirements. For example, say your portfolio is still worth $1.3 million at age 73. Your RMD requirement It will be 49,056 dollars. This is less than you need to take out of your portfolio to meet your income needs. So make sure you stay on top of your annual RMD requirements. You don’t want these teasing you.
Ultimately, everyone’s financial profile and goals are unique. Think about it Talk to a trusted financial advisor About building and executing a plan based on your circumstances.
Can you retire at 62 with $1.3 million in the bank? It depends on your spending needs, but this type of money can provide a fairly comfortable, stable income, even if you decide to retire early. You will need to plan for taxes and inflation, but this may be worth discussing with your financial advisor.
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool It matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to determine which one you feel is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to high volatility, like the stock market. The trade-off is because 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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