I Have $2.5 Million in a Roth IRA and Will Receive $2,500 Monthly From Social Security. Can I Retire at 62?

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.”

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“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 when necessary.

Spending and Lifestyle

This brings us to the last big question. What do you plan on for your lifestyle?

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

“The more lavish and grand you decide to go will ultimately cost more than a simple, easy retirement, which will put you at risk of outliving your savings and leave you unable to cover expenses with only a Social Security check.”

As we noted above, depending on how you manage your investments, you can probably plan for an income of around $100,000 per year plus another $30,000 per year in Social Security. Under ordinary circumstances, that should take you into your early 90s, possibly longer. If you need more help planning a retirement budget or building an income plan, consider speaking with a financial advisor.

So there are two lifestyle issues to consider. First, does your lifestyle fit a $ 130,000-per-year budget? If your lifestyle in retirement will exceed this spending limit, what changes can you make to meet that goal? Or, otherwise, are you 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 your 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 specific areas in 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 deal with unexpected expenses. It might not be fun to skip out on your annual trip or to 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 spending and work backward. Once you know how much money you’ll need and how much you’ll want, you can have a good sense of whether you have enough money to retire.

Bottom Line

A $2.5 million Roth IRA and Social Security benefits of $2,572 per month will put a person in a strong position to retire at age 62. Their investments and monthly benefit checks will provide around $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 regularly spend.

Retirement Spending Tips

• Part of planning for your retirement spending is to estimate how much less you will need. Research has shown that a person’s wealth and health are two essential factors in just how much their spending falls in retirement.

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

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