Can a Couple Retire in 2 Years at 60 with $1.4 Million in IRAs and Fully Owning a $750k Home?

Can a Couple Retire in 2 Years at 60 with .4 Million in IRAs and Fully Owning a 0k Home?

A couple does some rough calculations at the kitchen table to determine if they can afford to retire at age 60.

Retiring early can be tricky, even if you have considerable equity in your home.

Let’s say for example that you are married with $1.4 million in your IRA and a house worth $750,000. Retiring early may be within your reach, but you may face some significant challenges. Retiring at age 60 means having to wait several years before being eligible for Social Security and Medicare, potentially leaving you too reliant on your portfolio income. Meanwhile, turning your home equity into cash can supplement your nest egg, but it may increase your housing costs in the future.

If you need help assessing whether early retirement is within your reach, try connecting with a financial advisor.

Potential problems with early retirement

Although everyone’s situation is different, early retirement poses some major challenges: the several-year delay before Social Security and Medicare take effect, as well as an early reliance on portfolio withdrawals.

Social Security delay

First, retiring before age 62 means you won’t have immediate access to Social Security.

Although 62 is the minimum age to start receiving Social Security benefits, that means taking a 30% cut. reduction in benefits for the rest of your life. However, you will only receive your “full” benefit if you wait until your full retirement age (67 for most). Waiting until age 70 to file for Social Security can increase your benefits by at least 24%, but it will mean relying on other sources of income until you’re 70.

By retiring at age 60, for example, there would be a gap of at least two years before you could collect Social Security. If you’re already planning to live on a tight budget in retirement, not receiving these benefits could put a strain on your finances.

Health insurance delay

Retiring early also means budgeting for health insurance.

Health Insurance Coverage begins at age 65, at which point you’ll have substantial (but not comprehensive) health insurance through the government. You may also want to budget for additional coverage such as gap and long-term care insurance. However, by retiring at age 60, you will also need to replace any health insurance you received through your employer.

If you already pay for your health insurance out of pocket, keep this item in your budget. Otherwise, evaluate individual coverage plans and factor these premiums into your retirement budget.

Dependence on portfolio income

Finally, retiring early means you will move from the accumulation phase to the withdrawal phase sooner than others. Although your portfolio will continue to generate returns in retirement, most households withdraw money faster than their portfolio accumulates it.

If you retire at 60 instead of 67, you’ll have to rely more on your portfolio for seven more years. As with Social Security, make sure you have enough money to live a comfortable life during these extra years. Otherwise, early retirement may not be wise. And if you help assess the lifespan of your assets, a Financial Advisor can help.

Income and Budgeting for Early Retirement

A couple who retired at age 60 enjoy a fall day together.A couple who retired at age 60 enjoy a fall day together.

A couple who retired at age 60 enjoy a fall day together.

In a sense, retiring early is no different than any other time. It all comes down to income versus expenses. If you have enough benefits and assets to cover your lifestyle for a predictable lifetime, you may be able to afford retirement. If not, something needs to change.

In the hypothetical scenario above, you and your spouse are 58 years old with $1.4 million in your IRA and a paid-off home worth $750,000. Could you afford to retire at 60?

Assuming your IRA balances grow, say, 5% per year, over the next two years you would end up with about $1.54 million. Using the 4% rule For withdrawals, you and your spouse could potentially afford to withdraw $61,600 from a balanced portfolio (50% stocks, 50% bonds) during your first year of retirement and then adjust your withdrawals at the rate of inflation in the following years. Although the 4% rule is a static approach that doesn’t take into account your changing spending needs, it is designed to make a retirement portfolio last up to 30 years. However, because the money is in a pre-tax account, you’ll also need to consider the taxes you’ll owe on withdrawals.

Whether your IRA and Social Security benefits (when they begin) will be enough to support your lifestyle for the rest of your life depends not only on how long you live, but also on how much you you plan to spend.

There are several ways to increase this income, but all come with their own risks and rewards. For example, you could invest in a guaranteed life annuity. A representative annuity bought for $1.4 million, you could pay $8,041 per month or $96,492 per year. Although an annuity can generate annual income above the 4% rule, at least initially, annuities are generally not indexed for inflation. At standard rates, the purchasing power of this income would be about half its initial value in 30 years.

On the other hand, let’s say you and your spouse are delaying retirement. If your IRAs were to grow 5% per year between ages 60 and 67, you could retire with more than $2.17 million. At this point, withdrawing 4% in your first year of retirement would yield $86,800 before taxes. You would also have seven fewer years of retirement to fund. But if you need help developing an income plan for retirement, consider work with a financial advisor.

Using your home equity to fund early retirement

A couple looks at real estate listings on a tablet to determine whether downsizing is financially justified. A couple looks at real estate listings on a tablet to determine whether downsizing is financially justified.

A couple looks at real estate listings on a tablet to determine whether downsizing is financially justified.

And then there is the house. Many retirees anticipate that their home will be a significant, if not primary, source of wealth in retirement.

In theory, selling your $750,000 home in two years and adding the proceeds to your retirement nest egg would bring your total assets to $2.29 million before taxes. Again, this assumes your IRAs grow 5% per year over the next two years. Withdrawing 4% of this cumulative amount of money would produce an income of $91,600 in your first year of retirement.

But your home equity isn’t a full-value financial asset, because you’ll still need a place to live. If you buy a new house, you can only invest what’s left. Taking out a mortgage would cost even more due to interest and leave you with a new monthly expense.

Renting involves lower stakes but will increase your monthly budget indefinitely. Especially if you live in an expensive city, you’d be trading the low costs of paying for a home (insurance and taxes) for a monthly rent that will likely increase with inflation.

These are all things to consider when considering tapping into your home equity in retirement. But if you need an expert’s perspective, talk to one Financial Advisor.

Conclusion

Retiring early is an ambitious and spectacular goal. If you’re considering retiring before age 65, it’s important to consider moving parts like Social Security, Medicare, and additional years of portfolio withdrawals ahead. Retiring early is possible, but make sure you have enough reliable money before taking the plunge.

Retirement Planning Tips

  • A Financial Advisor can help you develop a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

  • One option we haven’t discussed is reverse mortgagea financial product designed to allow retirees to obtain equity value in their home without having to sell the property. These loans can be valuable and riskyand it’s worth thinking carefully about whether a reverse mortgage is right for you.

Photo credit: ©iStock.com/Ridofranz, ©iStock.com/kali9, ©iStock.com/Paperkites

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