When thinking about whether you’re financially prepared to retire or not, you’ll want to think about it in a certain way. You have a lifestyle that you would like to maintain, and a portfolio that can safely generate a specific amount of income each year. Once your costs and means overlap, you can afford to retire.
Here, we have $1.4 million in assets and $5,000 in monthly expenses. Depending on your personal situation, this type of portfolio may last through retirement with proper planning and if you can supplement it with enough Social Security income, but the bigger question is if you should you retire before 60.
Do you have specific questions about retirement? Speak with a financial advisor today.
Early Retirement Raises Its Own Issues
At age 59, you’ll retire six years early and eight years early by Medicare and Social Security standards, respectively. This raises several issues, all of which will shift your retirement costs.
Plan for More Time in Retirement
For the sake of this example, let’s say that on average someone in their 60s can expect to live until around age 87. This has given rise to the standard 4% rule of retirement planning. Anticipating 25 years of withdrawals lets a 67 year old retiree plan for their average life expectancy with some room for happy error.
If you retire at 59, you may want to plan, using this example, for more like 35 years-plus of withdrawals to cover the same room for error. In that case, you will probably want to plan for annual withdrawals in an amount less than 4%.
Plan for Less Access to Social Security
The earliest you can plan on taking Social Security is age 62, but doing so would lock in reduced benefits for life. To collect “full” Social Security benefits, you will need to wait until age 67, and to collect maximum benefits you will have to wait until 70. This will increase the amount you need to withdraw from your portfolio as you wait for benefits to kick in.
Plan for More Health Insurance Costs
You will become eligible for Medicare at age 65. Between now and then, you will need to pay for your own health insurance. This will add to your monthly costs, meaning you should plan for more like $5,500 per month, on top of the standard gap insurance and long-term care insurance that most retirees need to anticipate.
Plan for More Inflation
Finally, the longer you spend in retirement, the more you will need to anticipate inflation. Ideally, you can build an investment strategy that helps your portfolio cope with rising prices, or, at least for as long as the portfolio lasts.
However, this may remain an issue since, at a modest 2% inflation rate, prices will fully double over the course of a 30-year retirement. This issue grows even more acute if you live in an expensive city, where prices and rents rise more quickly than national averages.
Retiring Early With This Portfolio Could Cause Problems Down the Road
What Kind of Assets Do You Hold?
This question assumes this person holds $1.4 million in assets, but the nature of those assets makes a big difference. For example, do you hold all of this money in a retirement account or in a non-tax-advantaged portfolio? Does a large percentage of this net worth include your home, and if so, do you plan on selling it?
All of this matters because some asset classes are more liquid than others. Indeed, if you’re like many people, you might not want to include your home equity in this plan at all, because it might not be practical to convert into useful cash. And if you hold these assets in tax-advantaged retirement accounts, you cannot retire until age 59.5 without potentially encountering penalties (though you can avoid this with the rule of 55).
But for the sake of analysis, we will move forward assuming that this is $1.4 million in accessible portfolio holdings.
This Can Work, But It Will Be Tight
Our first back-of-the-envelope math doesn’t look great. You’re 59 years old with (for ease of use) an 87-year life expectancy. Giving yourself a five-year margin of error, that means you’d need up to 33 years of portfolio withdrawals. Without assuming outsized portfolio returns, that gives you $3,535 per month in income.
Now, the two questions here help account for portfolio returns and Social Security income. Social Security will supplement your income somewhat, but to make this plan work you will need above-average benefits. Specifically, you will need to collect about $2,000 per month in Social Security starting at age 67, which is the full retirement age for most.
If you can plan on that, then you can withdraw $60,000 per year from your portfolio until age 67. That will draw you down to $920,000 in assets over eight years. At age 67, a 4% annual withdrawal from that remainder will generate $3,066 per month. From there, $2,000 in benefits per month will get you right back to that $5,000 goal.
Portfolio returns, too, can help change the math on your retirement planning. But this portfolio isn’t quite generous enough to throw off the somewhat safe returns that will set you up for life. For example, you could invest for growth. According to Vanguard, a 60/40 portfolio of stocks and bonds has a solid chance to generate returns of around 7% for 2024. If you hit that mark every year, reliably, you could in theory draw down $98,000 each year in pure returns.
That could give you a strong retirement outlook well beyond your needs, but nothing is ever guaranteed with the stock market. But that’s a very big if, because you would need to manage the volatility of an equity-heavy portfolio. Right now your plan doesn’t contain that margin for error, which means that trying to live off portfolio’s returns is a big risk.
You Will Have a More Comfortable Retirement by Waiting
A potentially safer option could be to wait. For example, let’s take that 7% returns projection again. Say that you keep your portfolio invested in a 60/40 mixed collection of bonds and stocks generating 7% annually. If you wait until just age 64, you could retire with nearly $2 million in the bank. By full retirement age at 67, you could have $2.4 million.
Bottom Line
At age 59, can you retire with $1.4 million in assets on hand? The answer is, maybe, but you should really think it through. This would likely be a tight retirement without much room for error, and you’re not many years away from affording a comfortable retirement with plenty of security.
Early Retirement Tips
- 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, 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.
- You really can retire early, but you’ll need to start planning in advance. Check out SmartAsset’s guide on how to retire early to learn more.
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