Is $2.5 million in Roth savings and $2,500 in Social Security enough for a 62-year-old’s retirement?

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Retiring at age 62 and claiming Social Security will reduce a person’s lifetime benefits by up to 30% compared to waiting until full retirement age. However, a person with $2.5 million in a Roth IRA may feel more comfortable retiring at age 62, despite the impact early retirement will have on Social Security.

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So can a person with $2.5 million in a Roth IRA who expects to collect around $2,500 in monthly Social Security checks afford to retire at age 62? The answer is likely yes, but there are a few critical things to keep in mind if you’re in a similar financial situation.

Don’t overestimate your benefits

First, make sure how much your Social Security benefits will be. Mike Dever, founder and CEO of Brandywine Asset Management, says a person who expects to collect $3,000 at age 62 has miscalculated their Social Security income.

While the full retirement age for someone retiring today is 67, the most a person can cash in at age 62 is $2,572, Dever noted.

The $428 difference between $3,000 in monthly benefits and $2,572 is not in itself essential. Most of this retiree’s income will come from his $2.5 million Roth IRA. But the bigger issue is absolutely critical: Beware of miscalculations.

A person who expects to receive $3,000 in monthly benefits at age 62 would end up with $5,000 less in annual income. Check all your assumptions before you leave the workforce, because you don’t want to discover a mistake like this after the fact. A financial advisor can help you estimate and plan your Social Security benefits.

Prepare for inflation and volatility

A Roth IRA balance of $2.5 million can allow a retiree to plan relatively generous withdrawals.

“The 4% withdrawal rule can be a useful starting point,” said Bryan Cannon, author of Retirement Unplanned: An Expert Guide For Navigating The Crossroads of Retirement With Confidence. Given that both corporate bonds and Treasuries have average interest rates of about 4%, “The Roth IRA would generate tax-free income of $100,000 annually during retirement, typically without depleting your capital over time” .

“However,” he said, “it is essential to be cautious when following the 4% rule.”

There are two big risks despite this well-funded retirement account, but a financial advisor can help you prepare for both.

Consider the impact of inflation

First, as Dever noted, inflation is a hidden risk. Most investors learn the common wisdom of investing in growth-oriented assets during their working lives and in more conservative, income-oriented assets once they retire. This is a strategy built around protecting your nest egg in your retirement years.

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The problem is, you won’t generate any new growth. At best, your portfolio will keep up with your withdrawals. More likely, your withdrawals will modestly outpace growth while the value of that money steadily declines due to inflation.

“The problem with this type of retirement structure, where you rely on fixed income, is the risk of inflation,” Dever said. “If inflation stays low, as it has been until recently, it’s not a big problem … but the problem you have there is if inflation goes up, you’re just overwhelmed.”

“Your liabilities are growing significantly while your assets are flat.”

Dever and Cannon emphasized managing retirement investments. Look for more than standard safety-oriented assets because you’ll need growth to at least partially offset both your withdrawal rate and inflation over the long term.

Protect against market volatility

This raises the second risk, however. As you manage your portfolio until retirement, you must also plan for market volatility.

“Market volatility can cause your income to fluctuate over time,” Cannon said. “For example, if you intend to withdraw 4% from a $2.5 million ($100,000) account, but your investments decline 20% due to negative market returns, your 4% withdrawal would produce only $80,000.”

“If you’ve structured your retirement lifestyle around withdrawing $100,000 a year, you’ll be forced to increase your withdrawal rate to 5 percent,” he added. And that can quickly lead to an irreversible cycle of asset depletion and increased withdrawals to compensate.

Dever and Cannon agreed that the way to handle this is to remain flexible with both investments and withdrawals. Build a smart portfolio that seeks some growth while maintaining the ability to adjust your withdrawals when needed.

Expenses and lifestyle

This brings us to the last big question. What are you planning for your lifestyle?

Dutch Mendenhall, CEO of RAD Diversified REIT and author of “Money Shackles,” said it’s “the ultimate factor in determining how much money you need to save for a comfortable retirement.”

“The bigger and bigger you decide to go, it will eventually cost more than a simple and easy pension, putting you at risk of outliving your savings and not being able to cover your expenses with just a check of social security.”

As mentioned above, depending on how you manage your investments, you can probably plan on an income of about $100,000 per year plus another $30,000 per year in Social Security. Under normal circumstances, that should get you into the early 90s, possibly higher. If you need more help planning a retirement budget or building an income plan, consider talking to a financial advisor.

So there are two lifestyle aspects to consider. First, does your lifestyle fit a $130,000 a year budget? If your retirement lifestyle will exceed this spending limit, what changes can you make to achieve this goal? Or are you otherwise comfortable waiting another five years to get more Social Security and let your IRA grow even more?

Second, what kind of flexibility does your lifestyle have? “Consider travel plans, housing expenses, potential moves or events you want to see in your life,” Mendenhall said. “These factors will help you determine where you should cut back on certain areas of your life to make these dreams possible.”

If your lifestyle has more flexibility, you’ll have more room to invest for growth and be able to handle unexpected expenses. It might not be fun to give up your annual trip or cut back on other luxuries, but if your annual budget needs to drop to $110,000, you can do it.

Build a plan for your expenses and work backwards. Once you know how much money you’ll need and how much you’ll want, you can get a good idea of ​​whether you’ll have enough money to retire.

Conclusion

A Roth IRA of $2.5 million and Social Security benefits of $2,572 per month will put a person in a strong position to retire at age 62. Investments and monthly benefit checks will provide about $130,000 in the first year of retirement, which should be enough depending on their lifestyle. At the end of the day, it depends on a retiree’s lifestyle expectations and how much they plan to spend on a regular basis.

Tips for Retirement Spending

• Part of planning for retirement spending is estimating how much less you will need. Research has shown that a person’s wealth and health are two key factors in how much retirement spending falls.

• 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.

• 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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Photo credit: ©iStock.com/FG Trade, ©iStock.com/Luke Chan, ©iStock.com/AzmanJaka

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