With careful planning, $2.5 million can fund a comfortable retirement starting at age 60. But as with any major life transition, retirees must weigh a complex set of variables from taxes to healthcare to ensure their nest egg lasts decades. Though everyone’s situation differs, this level of savings can provide most the flexibility to retire if desired, especially if paired with even modest Social Security income starting a few years later.
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The Fundamentals of Retirement Planning
Deciding if you have enough saved to retire hinges on estimating future costs and income streams over an expected lifetime. At its simplest, this involves projecting how much income you’ll have from various sources and preparing post-retirement budgets for expenses.
To make an optimal decision, especially if you’re considering retiring earlier than typical, you also have to account for age-related factors. These include healthcare expenses before Medicare eligibility at age 65 and penalties for most retirement account withdrawals before age 59.5.
Social Security timing strategies are also important. These are based on personal circumstances and call for balancing tradeoffs between maximizing monthly benefit amounts and starting benefits earlier. Required minimum distribution (RMD) rules that go into effect after age 73 represent another significant consideration.
Identifying an appropriate withdrawal rate that maintains principal is also key. This will vary depending on your portfolio strategy, asset allocation and investment performance. However, it’s often suggested to use a rate between 4% and 6%, depending on where you look.
Examples of Retiring at 60 with $2.5 Million
Rather than trying to figure out your personal retirement income and expenses in detail, you can use income replacement. For a 60-year-old earning $100,000 annually, the target budget number for income could be, say, $70,000 per year. This is using a 70% income replacement guideline.
The 4% withdrawal rate is another guideline that assumes withdrawing that percentage of a portfolio annually, adjusted for inflation, will allow a nest egg to last as long as a typical retirement. Withdrawing 4% annually from a $2.5 million portfolio would generate $100,000 in retirement income. This covers the $70,000 income replacement target, with a nice cushion of $30,000 per year.
For most people, savings represent only one source of potential income in retirement. Additionally, this individual could start taking Social Security benefits as early as age 62. Alternatively, they could wait to claim their benefits until reaching full retirement age at 67, or even longer at 70. This would qualify them for higher monthly benefit amounts, with the tradeoff of starting them later.
Taxes represent another key component of this decision. While completely avoiding taxes is not possible, there are moves you can make to manage or minimize taxes. For instance, converting some pre-tax savings to a Roth IRA early enough before retirement would avoid tax bills later at the cost of paying more taxes now. An advisor can run projections to inform conversion pacing and amounts.
Additional variables that could impact a retirement decision include healthcare costs, investment performance and inflation. While these variables can’t be forecast with certainty, making educated guesses about their future values can help you plan effectively.
Making the Call
Ultimately, $2.5 million can reasonably support retiring at 60 if assumptions around withdrawal rates, taxes, healthcare costs and other factors hold up. Being flexible about expenses and having some income options as a potential backup provide wiggle room in case things don’t work out exactly as expected. Working with a financial advisor to stress test plan viability across various market and lifespan scenarios is prudent to ensure savings stand the test of time.
Despite your best efforts at planning, some uncertainties and risks remain when deciding if and when to retire. Extended periods of high inflation could erode purchasing power more quickly, or health issues could also drive expenses higher, especially in early retirement before Medicare eligibility at 65. To counter fiscal risks, retirees should build in some margin like having income streams beyond portfolio withdrawals.
While $2.5 million doesn’t guarantee a secure retirement at 60, it does provide more options than some retirees might have. Weighing complex projections around taxes, healthcare costs, withdrawal rates and Social Security tradeoffs can inform next moves. As no plan survives first contact with reality perfectly, working with an advisor and retaining some flexibility helps retirees call audibles while protecting savings.
Retirement Planning Tips
- A financial advisor can help stress test your retirement plan across lifespan, market and tax scenarios to assess feasibility. 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, 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.
- While you can’t know exactly what will happen in retirement, SmartAsset’s retirement calculator can help you produce a reasonable estimate of who well prepared you are.
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