With $1.4 million in IRAs and a $750,000 house payment, can we retire at 60?

Withdrawing early can be difficult, even if you have considerable equity.

Say, for example, you’re married with $1.4 million in your IRA and a home worth $750,000. Early retirement might be within reach, but you might face some big challenges. Retiring at age 60 means you have to wait several years to become eligible for Social Security and Medicare, potentially leaving you dependent on portfolio income. Turning home equity into cash, meanwhile, can fill your nest egg, but could increase your housing costs in the future.

If you need help evaluating whether early retirement is within your reach, try contacting a financial advisor.

Potential problems with an early retirement

While each person’s situation is different, early retirement poses some key challenges: the years-long delay before Social Security and Medicare kick in, and an early reliance on portfolio withdrawals.

Social security delay

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

While 62 is the minimum age to start receiving Social Security benefits, doing so means receiving a 30% reduction in benefits for the rest of your life. However, you won’t get the “full” benefit unless you wait until 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.

Retiring at 60, for example, there would be at least a two-year gap before you could collect Social Security. If you already expect to live on a tight budget in retirement, not having these benefits can put a significant strain on your finances.

Medicare Delay

Retiring early will also mean budgeting for health insurance.

Medicare coverage begins at age 65, at which point you will receive significant (but not comprehensive) health insurance through the government. You may also want to budget for additional coverage, such as long-term care and long-term care insurance. However, by retiring at age 60, you should also replace any health insurance you received from your employer.

If you already pay for health insurance out of pocket, keep that item in your budget. If not, value individual coverage plans and factor those premiums into your retirement budget.

Dependence on portfolio income

Finally, early retirement means that you will move from the accumulation phase to the withdrawal phase earlier than other people. While your portfolio will continue to generate returns in retirement, most households withdraw money faster than their portfolios accumulate.

The story continues

If you retire at 60 instead of 67, you should rely more on the portfolio for another seven years. As with Social Security, make sure you have enough money to support a comfortable lifestyle for those extra years. If not, early retirement may not be wise. And if you need help assessing how long your assets can last, a financial advisor can help.

Income and budgeting for early retirement

In some ways, early retirement is no different than ever before. It all comes down to income versus expenses. If you have enough benefits and assets to cover your lifestyle for a foreseeable lifetime, you may be able to afford to retire. If not, then something needs to change.

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

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

Whether your IRA and Social Security benefits (when they start) would be enough to support your lifestyle for the rest of your life depends not only on how long you’ll live, but how much you expect to spend.

There are several ways to increase this income, but they all have their own risks and benefits. For example, you can invest in a guaranteed lifetime annuity. A representative annuity purchased for $1.4 million could pay $8,041 per month or $96,492 per year. While an annuity can provide a higher annual income than the 4% rule would — at least initially — annuities typically aren’t indexed for inflation. At standard rates, the purchasing power of this income would be worth about half its original value in 30 years.

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

Using equity to fund an early retirement

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

In theory, selling your $750,000 home in two years and adding the proceeds in retirement would bring your total assets to $2.29 million before taxes. Again, this assumes the IRA grows by 5% per year for the next two years. Withdrawing 4% of that pot of money would produce $91,600 in income in the first year of retirement.

But 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 is left. Taking out a mortgage would cost even more in 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 trade the low costs of a paid-off home (insurance and taxes) for monthly rent, which will likely rise with inflation.

These are all things to think about when thinking about tapping into your retirement equity. But if you need an expert’s perspective, talk to a financial advisor.

Conclusion

Early retirement is an ambitious and spectacular goal. If you plan to retire before age 65, it’s important to consider moving pieces like Social Security, Medicare, and additional years of portfolio withdrawals. Early retirement is possible, but make sure you have enough reliable cash on hand before taking the leap.

Retirement Planning Tips

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

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

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off 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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