With retirement nearly within your grasp, a few years more of working may seem daunting. But before you make any final decisions, you must make sure you can retire securely.
Here, we have a profile with about $1.75 million in savings on top of Social Security. Can you retire now? It depends on factors specific to your life and finances.
Here are some important things to consider.
Talk to a financial advisor today about the best way to reach your financial goals.
Organize Your Finances
First you need to be up to speed with your financial picture to date.
“The first thing someone should do is ensure they’ve established sufficient emergency funds,” said Jeremy L. Suschak, CFP® with DBR & Co. “Second, we would suggest paying off any high interest liabilities that might exist. Third, the individual should establish an estate plan… Fourth, the individual should make sure he or she has appropriate insurance coverage.”
In other words, get organized. Before retiring, make sure to consider the headline financial issues that you will face before leaving work. Do you have enough for surprise expenses? Have you paid off major debts? Are you prepared for supplemental and long-term care insurance?
And, said Suschak, what will your spending look like?
This last will tell you if you “should” retire.
With $1.75 million in savings, you can almost certainly pay the bills. For example, say that you withdraw $50,000 per year. That will pay for basic food and housing in most places, and will last you 35 years even without accounting for Social Security benefits.
But you might want more than basic food and housing. That’s where budgeting comes in. What does your lifestyle look like? How much do you spend on housing right now? How much do you spend on food, entertainment and travel? And how do you want all that to change once you enter retirement?
A good rule of thumb is to assume you’ll need about 80% of your pre-retirement spending, so start there and work backwards.
A financial advisor can help you with retirement and estate management.
Calculate Your Social Security Income
Next, figure out your Social Security benefits.
If you begin collecting Social Security at 62, the SSA will reduce your lifetime benefits to 70% of their possible value. This means you can collect up to $2,572 per month as of 2023. You can also retire at 62 but delay collecting benefits, pushing your maximum benefits as high as $4,555 if you wait until age 70.
Either way, the amount you receive will be based on the Social Security credits you earned while working. Make sure you have a sense of what that will be.
Finally, get your money out of cash.
As Suschak told SmartAsset, you should consider tactical opportunities and the long-term strategy for this money. Most importantly, move that $1 million into an account “that aligns with [your] risk profile and long-term investment goals.”
Shifting your money from cash into investments will make a huge difference in your retirement income. The same is true of managing your current IRA. For example, say that you want to keep a safe, conservative approach to your retirement. You could put all $1.75 million into an annuity and potentially collect $10,753 per month (about $129,000 per year). Or you could take a higher-risk approach, putting everything into an S&P 500 fund. With the market’s historic 10% annual rate of return, that could net you $175,000 per year – if you can handle the volatility of losses and down years.
Or you could split the difference. As recommended by Tim Maurer, Chief Advisory Officer for Signature FD, you could distribute your investments for security and growth based on your needs and your financial flexibility.
For example, say that you need $4,500 per month ($54,000 per year) to pay the bills. Setting aside Social Security, you could roll your IRA into an annuity that generates $5,224 per month in reliable, guaranteed income for life. Then you could invest your $1 million in an S&P 500 fund and collect the 10% average return. With your needs taken care of, you can ride out the volatility of the stock market while pursuing its gains.
It’s important to have a diversified portfolio suited to your risk tolerance. Talk to a financial advisor to build your investment strategy today.
With $1.75 million in cash and investments, plus Social Security benefits, you can almost certainly afford to retire early. Whether you should do so is another question, one that depends entirely on your needs and lifestyle.
Early Retirement Tips
- Early retirement has become a watchword for many people these days. With careers growing more demanding, perhaps it’s no surprise that people would like to maximize their wealth and get out when they can. If that describes you, here’s what you should know.
- 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.
Photo credit: ©iStock/JLco – Julia Amaral