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Ask an Advisor: I Have $1.15 Million Saved and Will Collect $3,500 Per Month in Social Security. Can I Retire at 62?

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Financial advisor and columnist Brandon Renfro

I am 57 and have $1.1 million in my 401(k) and $50,000 in a high-yield savings account. I earn $300,000 per year and put $30,000 in my 401(k) each year plus a match on the first 6%. I have a $220,000 mortgage on a home valued at $550,000. I would like to retire at 62 with no debt.

My wife and I will collect $3,500 each month in Social Security and if I withdraw $5,000 per month from my 401(k), I’ll have a projected positive cash flow of $1,800 each month. My monthly budget includes $1,000 for property taxes and insurance on my home and $1,000 for health insurance until we qualify for Medicare at 65. Is this a good plan? What could I do to make it better besides delaying retirement?

-Shaun

It sounds like you’ve worked out your retirement budget and believe that if you follow the plan outlined above you’ll be able to cover all of your expenses and have an extra $1,800 left over at the end of each month. If that’s the case, this plan sounds pretty reasonable on the surface. However, let’s dive a bit deeper into your plan and what you should be thinking about. (And if you have similar questions about your retirement outlook, consider working with a financial advisor.)

Sustaining Your Withdrawal Rate

A man looks over his retirement savings on his laptop.

A big issue will be whether or not you can reasonably sustain a $5,000 monthly withdrawal from your 401(k). That will depend heavily on your balance at age 62.

I’m not sure about your risk tolerance or how you invest your money so I estimated what your 401(k) balance might be worth by the time you turn 62 using a range of possible returns. You can use your own estimate based on your investment plan.

Ignoring the $50,000 in your savings account, let’s assume you have between $1,570,000, and $1,950,000 in your 401(k) by the time you retire. Don’t read too much into these numbers, they are just rough estimates that provide us with a range.

A monthly withdrawal of $5,000 from a $1,570,000 portfolio equates to a 3.8% annual withdrawal rate. You’ll need to decide for yourself based on how much risk you want to take if that works for you, but it’s certainly a reasonable number. And if you have $1,950,000 at retirement, withdrawing $5,000 each month means your annual withdrawal rate would barely be 3%, which is even better. (And if you need help calculating your own safe withdrawal rate, consider matching with a financial advisor.)

Scrutinizing Your Cash Flow

A couple reviews their retirement with their financial advisor.

It also depends on what you mean by positive cash flow. If you were my client I’d be very interested to hear more about your budget with an eye toward whether or not you made adjustments for taxes and recreational spending.

Your projected cash flow could potentially be way off if you didn’t include the taxes you’ll pay on your Social Security benefits and 401(k) withdrawals.

Also, you’ll want to make sure you account for any lifestyle changes you might experience since retirement doesn’t simply mean you no longer go to work. After all, you’ll be doing something with your time.

I may be taking a leap, but it sounds like you’ve worked debt payoff into your budget before retirement. Because of that, I didn’t think we needed to discuss withdrawing from retirement savings to account for debt payments. Of course, if my assumption is wrong then that will be a big consideration as well. (A financial advisor can help you assess your income needs in retirement.)

Next Steps

To improve your plan even more, I’d suggest that you think about planning for unexpected expenses and healthcare, including long-term care. That could involve purchasing a long-term care insurance policy, self-insuring or even involving other family members. There are many ways to plan for these types of expenses. The point is that long-term care and unexpected retirement expenses are too large of a risk to ignore.

Tips for Finding a Financial Advisor

  • If you don’t have a financial advisor yet, finding one 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 free introductory calls 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.
  • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.

Photo credit: ©iStock.com/Drazen_, ©iStock.com/DragonImages

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