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Many 60-year-olds with $960,000 in tax-deferred retirement accounts and a work history that will entitle them to $2,400 monthly from Social Security could probably retire in two years. However, much depends on circumstances. Individual lifestyle preferences, including local cost of living and plans for travel or other potentially costly recreational activities, could mean that delaying retirement for a period would make sense. Other factors to consider include your personal debt load, particularly whether you have an existing mortgage, and the outlook for your personal healthcare costs and overall longevity. Even a seemingly well-funded retirement could fall short if things turn out the wrong way.
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Deciding whether or not you can retire involves balancing your expected income in retirement against your expected expenses. If it appears you will likely have enough funds to pay your costs of living, with a cushion for contingencies, retirement may be feasible. Let’s start with the income aspect.
The $960,000 combined balances of your IRA and 401(k) accounts could grow to $1,099,104 over the next two years if you assume a 7% average annual return. A more conservative investment strategy emphasizing capital preservation over growth might be more appropriate for someone near retirement. This could average 5% annual growth, potentially giving you $1,058,400 in two years.
The 4% guideline suggests you can safely withdraw 4% of your retirement account balance each year, increasing the amount annually by the rate of inflation. Using this rule of thumb, someone with $1,058,400 would withdraw 4% times $1,058,400, or $42,336, the first year of retirement. Assuming 2% inflation, in the second year they would withdraw 102% of that amount, or $43,183, and so on. Financial modeling using a wide range of possible financial scenarios indicates a high likelihood that this strategy will enable a nest egg to last at least 30 years.
Now let’s turn to Social Security. These benefits are valuable sources of retirement income because they are guaranteed by the full faith and credit of the United States and include annual cost-of-living adjustments to counter the effects of inflation. Social Security pays you as long as you are alive and can continue paying your spouse and any dependents after you are gone.