Can We Retire At Age 60 In Two Years With $1.4 Million In IRAs And A $750,000 House Paid Off?

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Retiring early can be difficult, even if you have significant equity.

For example, say you're married with $1.4 million in IRAs and a house worth $750,000. Retiring early may be within your reach, but you may face some major challenges. Retiring at age 60 means you'll have to wait several years before qualifying for Social Security and Medicare, potentially making you too dependent on portfolio income. Converting your home equity into cash can help you fill your savings pot, but it could also increase your housing costs in the future.

If you need help assessing whether early retirement is within reach, contact a financial advisor.

While the situation is different for everyone, early retirement comes with some significant challenges: the years-long delay before Social Security and Medicare kick in, as well as an early reliance on portfolio withdrawals.

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, this means you will receive a 30% reduction in benefits for the rest of your life. However, you won't receive your “full” benefit until you wait until full retirement age (usually 67). If you wait until age 70 before filing for Social Security, you can increase your benefits by at least 24%, but this means you'll have to rely on other sources of income until age 70.

For example, if you retire at age 60, it will be at least two years before you can 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.

Retiring early also means budgeting for health insurance.

Medicare coverage begins at age 65, at which point you receive significant (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, if you retire at age 60, you will also need to replace any health insurance you may have purchased through your employer.

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

Finally, retiring early means that you move from the accumulation phase to the withdrawal phase earlier than other people. Although your portfolio will continue to generate returns after retirement, most households are withdrawing money faster than their portfolios are accumulating it.

If you retire at age 60 instead of age 67, you'll have to rely more heavily on your portfolio for another seven years. Just like with Social Security, make sure you have enough money to maintain a comfortable lifestyle for these extra years. If not, early retirement may not be wise. And to help evaluate the lifespan of your assets, a financial advisor can help.

A couple who retired at age 60 enjoy an autumn day together.

In some ways, 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 foreseeable lifetime, you may be able to afford to retire. If not, something needs to change.

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

Assuming your IRA balance grows at, say, 5% per year for the next two years, you would get about $1.54 million. If you use the 4% rule for withdrawals, you and your spouse may be able to afford to withdraw $61,600 from a balanced portfolio (50% stocks, 50% bonds) in your first year of retirement and then adjust your withdrawals to inflation in subsequent years. While the 4% rule is a static approach that doesn't take into account your changing spending needs, it is intended to make a retirement portfolio last up to 30 years. However, because the money is held in a pre-tax account, you also need to consider the taxes you owe on the 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 will live, but also on how much you expect to spend.

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

On the other hand, suppose you and your spouse delay retirement. If your IRAs grew at 5% per year between ages 60 and 67, you could retire with more than $2.17 million. At that point, withdrawing 4% in your first year of retirement would generate $86,800 before taxes. You would also have to finance seven fewer retirement years. But if you need help creating an income plan for retirement, consider working with a financial advisor.

A couple looks at the housing supply on a tablet to determine whether cuts make financial sense.

Then there is the house. Many retirees expect their home to be an important, if not the most important, 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 wealth to $2.29 million before taxes. Again, this assumes your IRAs grow at 5% per year for the next two years. Withdrawing 4% from that cumulative pot of money would produce an income of $91,600 in your first year of retirement.

But home equity isn't a full-value financial asset because you still have to live somewhere. If you buy a new home, you can only invest what is left. Taking out a mortgage would cost even more because of the interest, leaving you with new monthly costs.

Renting involves a lower commitment, but increases your monthly budget indefinitely. Especially if you live in an expensive city, you would be trading the low cost of a paid-off house (insurance and taxes) for a monthly rent that will likely increase with inflation.

These are all things you should think about if you are considering using your equity in your pension. But if you need an expert's perspective, speak to a financial advisor.

Retiring early 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 the additional years of portfolio withdrawals ahead of you. Retiring early is possible, but make sure you have enough reliable money on hand before you take the plunge.

A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not have to be difficult. SmartAsset's free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
One option we haven't discussed is the reverse mortgage, a financial product designed to let retirees get the value of their home's equity 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.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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The post We have $1.4 million in IRAs and own a $750,000 house outright. Can we retire at age 60 in two years? first appeared on SmartReads by SmartAsset.

Can we retire at age 60 in two years with $1.4 million in IRAs and a $750,000 house paid off?