The short answer to this question is, “Yes, provided you are prepared to accept a modest standard of living.” To get an an idea of what a 60-year-old individual with a $300,000 nest egg faces, our list of factors to check includes estimates of their income, before and after starting to receive Social Security, as well as expenses after retirement. Your own prospects in this kind of situation will vary, but by doing the sorts of calculations and estimates below, you’ll have a reasonable idea of what it will take for you to retire at 60 with $300,000. Consider working with a financial advisor as you explore your prospects for retiring early.
Income After Retirement: Social Security
A good place to start your assessment of whether you can retire at 60 with $300,000 is by looking at sources of income, including Social Security. The program is reverse-means tested, meaning that the less money you made during your working years the less generous your benefits in retirement. Earnings scale up to the maximum Social Security income, after which additional earnings no longer add to your lifetime benefits.
The maximum taxable income changes each year based on inflation. In 2022, it is set at $147,000, meaning that during 2022 you accrue the most Social Security credits if you earn up to that amount. If you earn less, you will collect fewer benefits when you retire. If you earn more, it will not add to your benefits.
Your benefits also change based on when you decide to retire. You receive the smallest amount of money if you file at age 62, scaling up each month that you wait until a maximum benefit payment at age 70. The standard set of benefits are paid at full retirement age, which is set at 66 years and four months for everyone under the age of 65 at time of writing.
Finally, Social Security benefits change each year as the Social Security Administration and Congress adjust this payment for inflation.
For 2022, the average retiree Social Security is $1,657 per month. For the purposes of this article we will assume a retiree who begins collecting benefits at full retirement age receives the average payment. You can calculate your own estimated benefits at the Social Security Administration’s website.
Income After Retirement: Investments and Savings
The average retirement account generates an average return of about 5% annually. Some estimates place this number higher, but we’ll use conservative math. With a retirement account of $300,000, this means an average return of about $15,000 per year. If you withdraw only those returns, you can generate income from your retirement portfolio without drawing down on the principal.
Let’s assume there are no income sources besides this $300,000 retirement account and average Social Security benefits. In this situation, an annual 2022 income would be:
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$15,000 from retirement savings
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$19,884 from Social Security payments ($1,657 per month)
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Total: $34,884 ($2,907 per month)
Income Before Social Security
The first two, six or eight years, depending on when you decide to start taking Social Security, will be the most financially challenging.
For example, if you begin collecting benefits at age 62 (the earliest you can do so), you cut your lifetime benefits to 70% of full value. In the case of an average Social Security benefit, this means that you reduce your Social Security benefits to $1,160 monthly or $13,919 annually and cut your total annual income (Social Security plus investment income) down to $28,918, or $2,410 per month.
In most cases, you will have to wait until age 66 and four months to collect enough Social Security for a stable retirement. If you want to retire early, you will have to find a way to replace your income during that six-year period. In most cases $300,000 is simply not enough money on which to retire early. If you retire at age 60, you will have to live on your $15,000 drawdown and nothing more. This is close to the $12,760 poverty line for an individual and translates into a monthly income of about $1,250 per month.
Potential Pitfalls
As tempting as it would be to draw down the principal of your retirement account, resist the urge. Consider the consequences of not resisting. To match the estimated $34,884 per year budget, you would need to withdraw $19,884 per year from the principal of your retirement account in addition to withdrawing all of its average returns, so nothing will replace those withdrawals. Over a six-year period this would chop your retirement account to $119,304 from $300,000. And as your withdrawals shrink your nest egg’s balance, that balance would produce less and less income. By the time you begin collecting Social Security, relatively little would be left of your original $300,000.
Therefore, with a $300,000 retirement account, the odds are you will need to wait until full retirement age before collecting Social Security benefits. Collecting Social Security early reduces your benefits for each month you start before full retirement age. If you begin collecting benefits at age 62 (the earliest you can do so), you cut your lifetime benefits to 70% of full value. In the case of an average Social Security benefit, this means that you reduce your Social Security benefits to $1,160 monthly or $13,919 annually, and your total income (Social Security plus investment income) down to $28,918 or $2,410 per month.
For most people this is not a practical budget. It is just a little over 200% of the national poverty line for an individual ($12,760 per year in 2022) and well below the median income. Even if practical for a short period of time, this budget leaves no room for unexpected or growing expenses. These could include higher medical bills as you age or inflation. It also removes any flexibility to adjust for market downturns in your retirement.
For most retirees, if possible, you should wait until full retirement age.
Retirement Expenses: Taxes
With a good sense of your annual income based on a $300,000 retirement, the next question is simple: Will that be enough?
With $34,884 in annual income and a planned retirement age of 60, we need to anticipate three main issues: Taxes, expenses and pre-Social Security expenses.
You may have to plan on paying income taxes in retirement. This depends on a number of factors, most critically whether you primarily used a 401(k) or IRA (which taxes your withdrawals) or a Roth IRA (which does not tax withdrawals). Social Security benefits may also be taxed, depending on how much you earn.
While not fully accurate, the best way to estimate if you will owe taxes on Social Security is to take half of your benefits and add them to the rest of your income. For an individual, if this comes to more than $25,000 per year from all sources, you will likely owe taxes.
In our case we would calculate taxes as follows:
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Social Security benefits = $19,884
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$19,884 ÷ 2 = $9,942
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All other income = $15,000
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$15,000 + $9,942 = $24,942
When it comes to taxes, a miss is as good as a mile. We are below the $25,000 cutoff for individuals, and so our Social Security benefits won’t see taxes. This leaves us with only $15,000 of potentially taxable income. But individuals avoid taxes on capital gains below $40,400, so there are also no taxes on this money.
Now, it’s important to understand that we did not include potential state taxes in this analysis. And individual circumstances will vary. However, in this case, with $300,000 in retirement savings, average Social Security benefits and an individual filer, we can expect to pay no federal taxes in 2022.
Retirement Expenses: Annual Cost of Living
With $300,000 and Social Security, you can expect to collect just under $35,000 per year. On a monthly basis, that works out to about $2,900 per month. Is that enough to live on? It depends on numerous variables:
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Do you pay a mortgage or rent?
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Groceries
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Utilities
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What are your taxes (property, state and federal)?
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What are your insurance (auto, life, medical, long-term care) expenses?
The above lists ignores entirely discretionary and luxury expenditures like travel and vacations. Even more critically, the above-listed expenses will rise yearly due to inflation.
In general, a retirement income of $35,000 is not unrealistic. At time of writing the median individual income in America, according to the St. Louis Fed, is $35,805. An income of approximately $35,000 is livable in the U.S. However, much of that depends on where you choose to live. Taking a retirement account like this to Kalamazoo, Michigan will be far more practical than trying to live in Chicago.
Reasons for Optimism
When trying to estimate your own lifestyle needs, most experts recommend estimating between two-thirds and three-quarters of your pre-retirement income. While working, you’ll have expenses that you won’t carry into retirement. In turn, you’ll also have more flexibility to move somewhere less expensive. That means that you’ll need less money than during your working life, though lifestyle bills can still add up.
In the case of a $34,884 retirement income, this estimate puts us around a pre-retirement income of $50,000 per year. If you earned around $50,000 per year before retirement, the odds are good that a $300,000 retirement account and Social Security benefits will allow you to continue enjoying your same lifestyle.
Bottom Line
By age 55 the median American household has about $120,000 saved for retirement, and about $212,500 in net worth. So getting to $300,000 by 60 means you’ll have to be a better saver or investor than the average American. That’s because for the majority of people, early retirement is probably off the table. But if you’re willing to budget and keep an eye – a very close eye – on your expenses, it is possible. Just remember that the years between age 60 and whenever you begin getting Social Security will be the most challenging.
Tips on Retirement
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You can do some learning about retiring on $300,000, but a financial advisor may have more insight into planning for this than you do. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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It pays to get a good estimate of whether you’re financially ready for retirement. Use SmartAsset’s free retirement calculator to begin.
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Source: finance.yahoo.com