I Have $1.1 Million Saved and Expect a $2,700 Social Security Benefit. Can I Retire at 65?

The question of when you can retire is at once complicated and, at the same time, simple.

Complicated, because it requires balancing portfolio risk and returns against future spending, potential needs and other unknowns. Getting all that right requires you to make a lot of educated guesses. Simple, because at the end of all that, it requires looking at just two basic numbers: money in and money out. If your retirement savings and benefits will bring in more money than you’ll spend, then you can retire. But it takes a lot of prep work to answer that question accurately.

For example, say that you’re 62 years old. You have $1.1 million saved up in a 401(k) and expect to earn $2,700 in full Social Security benefits. Can you retire at 65 years old? The answer is likely “yes”, but it’ll depend. Here’s what to consider.

Need help deciding when to retire, and creating a plan to get there? Consider working with a financial advisor.

Spending and Budget

The first thing to account for is your budget, your “money out.”

Here, we can use some basic back-of-envelope math. If you expect to collect $2,700 per year in full Social Security benefits, that means you probably earn about $64,000 per year right now.

In retirement, the average household should expect to need about 80% of their working-life earnings to maintain the same standard of living. This isn’t a hard and fast rule but, like the 4% rule, it’s a good place to start. Doing that math, you’ll probably need about $51,200 of retirement income once you retire.

Now, this isn’t a lot of money. In fact, it’s about two-thirds the U.S. median household income. So, make sure that you actually are comfortable and happy with your current standard of living. If not, figure out what number will pay for the life you’d really like to have.

Beyond that, it’s important to budget for the different long-term costs that are unique to retirees, or are commonly overlooked. For example, make sure to account for the costs of housing. If you rent an apartment, remember that your rent will increase each year, often by more than the cost of inflation. (In expensive urban areas, 5% to 10% annual increases are not uncommon.) If you own your own home, even if the mortgage is paid off make sure to budget for repairs, maintenance, insurance and property taxes.

A financial advisor can help you create a retirement plan based on your budget and resources.

Don’t forget the additional insurance and healthcare needs that retirement raises, as well. In particular, you should remember to budget for expensive drug and hospital costs, gap insurance and long-term care insurance. Those all pick up once you retire, and they can add extra costs to your budget.

Still, for the purposes of this example, we’ll use $52,000 as the amount of income required to retire at 65. Can we hit that target with this profile?

Taxes, Longevity and Inflation

Once you know your budget, consider some of the longer-term risks for retirees. Most specifically, make sure you don’t overlook taxes, longevity and inflation.

Taxes

Like all households, your total income and your spendable income are not the same thing. If you hold this money in a pre-tax portfolio like a 401(k) or a traditional IRA, you’ll need to pay income taxes on your withdrawals. Any assets held in a taxed account will generate either capital gains taxes or income taxes on each withdrawal, depending on the nature of the underlying assets. If you hold your money in a Roth IRA or a Roth 401(k) you won’t pay any taxes on those withdrawals.

Longevity

Then there’s longevity risk. This is the risk that you will outlive your savings and have only Social Security to rely on. Generally, the best way to prepare for this is to anticipate a longer lifespan. A median retiree will live into their late-80s, around age 85 to 87. Since this is the median, it means about half of retirees will live longer. The upshot is that a good hedge against longevity risk is to plan for retirement withdrawals into your mid-90s at least, ideally later.

Inflation

Don’t forget to hedge against inflation. Each year costs increase, which proportionally reduces your purchasing power. At the federal reserve’s benchmark 2% inflation rate, costs double about every 35 years. If you don’t prepare for this, it will significantly erode your standard of living over time. The best way to prepare for inflation is to calculate a 2% annual increase into your planned withdrawals and manage your investment plans accordingly.

Social Security and Portfolio Income

Now we’ll consider income, starting with Social Security.

You can collect full benefits starting at age 67. Before that, you can collect reduced benefits as early as 62 (with your monthly payment reduced for each month you begin collecting early) and increased benefits as late as 70 (with your monthly payments increased for each month you wait). This is a lifetime adjustment, meaning that collecting early or late will reduce or increase your benefits, respectively, for the rest of your life.

While this is a sliding scale, your three tiers of benefits would be:

Age 62: Reduced by 30% to $22,680 per year/$1,890 per month
Age 67: Full benefits at $32,400 per year/$2,700 per month
Age 70: Increased by 24% to $40,176 per year/$3,348 per year

If you retire at 65 and begin collecting benefits immediately, you should expect to receive around $2,350 per month, or $28,200 per year. (This is a rough approximation, since the SSA calculates your benefit increase or reduction on a monthly basis.)

You’ll almost always be better off waiting to collect your benefits, either until age 67 for full benefits or, if possible, until age 70 for maximum benefits. You’ll need to make up the income difference with increased portfolio withdrawals, but your long-term gains will typically outweigh the downside of reduced capital.

Then there’s your portfolio income. At age 62, you have three more years of working and saving ahead of you. If we assume a 10% ongoing 401(k) contribution and an 8% mixed-asset rate of return on your portfolio, by age 65 you might have around $1.4 million in your 401(k).

The income you generate from this portfolio will depend on how you manage it in retirement. However, even just using the 4% rule that would give you $56,000 per year of possible future income. Combined with your full Social Security benefits, that would give you $88,400 per year in inflation-adjusted income, significantly more than you make right now. What’s more, many financial professionals argue that the 4% method is too conservative given that corporate bonds alone pay an average 5% interest or more these days.

So not only should you be able to afford to retire at 65, you could also see a significant increase in your standard of living.

Bottom Line

With $1.1 million saved and $2,700 in anticipated Social Security benefits, you should be able to afford to retire at age 65. In fact, depending on how old you are right now, you can probably plan to retire even earlier.

Tips for Retirement Planning

A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. 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.
While we didn’t have time to explore the issue in detail, how you manage your portfolio in retirement matters enormously. It’s never too early to think about your asset allocation in retirement, and how you’ll plan for managing your assets.
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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