Retiring at age 62 and filing for Social Security will reduce a person’s lifetime benefits by up to 30% compared to waiting until their 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 that early retirement will have on their Social Security.
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So, can a person with $2.5 million in Roth IRA who expects to collect around $2,500 in monthly Social Security checks afford to retire at age 62? The likely answer is yes, but there are some critical things to keep in mind if you’re in a similar financial situation.
Don’t Overestimate Your Benefits
First and foremost, be sure about 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 collect at age 62 is $2,572, Dever noted.
The $428 difference between $3,000 in monthly benefits and $2,572 isn’t in and of itself essential. Most of this retiree’s income will come from the $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 62 would end up with $5,000 less in annual income. Double-check all of your assumptions before you leave the workforce, because you don’t want to discover a mistake like this one after the fact. A financial advisor can help you estimate and plan for your Social Security benefits.
Prepare for Inflation and Volatility
A Roth IRA balance of $2.5 million can allow a retiree to plan for 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 and Treasury bonds have average interest rates of around 4%, “your Roth IRA annually would generate $100,000 in tax-free income during retirement, typically without depleting your principal over time.”
“However,” he said, “it’s essential to exercise caution when adhering to the 4% rule.”
There are two big risks despite this well-funded retirement account, but a financial advisor can help you prepare for both of them.
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 life and more conservative, income-oriented assets once they retire. This is a strategy built around protecting your nest egg in your retirement years.
The problem is that you won’t generate any new growth. At best, your portfolio will keep pace with your withdrawals. More likely, your withdrawals will modestly outpace your growth, all while the value of that money is steadily falling due to inflation.
“The problem with that type of retirement structure, where you’re relying on fixed income, is inflation risk,” Dever said. “If inflation stays subdued like it had up until just recently, it’s not a big problem … but the problem you have in there is if inflation picks up at all, you’re just swamped.”
“Your liabilities are going up significantly while your assets are fixed.”
Dever and Cannon emphasized managing your investments in retirement. Look for more than the standard security-oriented assets, because you will need growth that at least partially offsets both your withdrawal rate and long-term inflation.
Protect Against Market Volatility
That raises the second risk, though. As you manage your portfolio through retirement, you need to also plan for market volatility.
“Market volatility can lead to fluctuations in your income over time,” Cannon said. “For instance, if you plan to withdraw 4% from a $2.5 million account ($100,000), but your investments experience a 20% decline due to negative market returns, your 4% withdrawal would only produce $80,000.”
“If you’ve structured your retirement lifestyle around withdrawing $100,000 per year, you would be forced to increase your withdrawal rate to 5%,” he added. And that can quickly lead to an irreversible cycle of depleting assets and boosting withdrawals to compensate.
Dever and Cannon agreed that the way to manage this is to stay flexible with both your investments and your withdrawals. Build a smart portfolio that looks for some growth, while maintaining your ability to adjust your withdrawals…
Read More: I Have $2.5 Million in a Roth IRA and Will Receive $2,500 Monthly From Social