I’m 60, just paid off my $1 million home and have $750K in retirement savings — can I retire now?
Question: I’m 60, just paid off my $1 million home and have $750,000 in retirement savings. Can I retire now? Please?
Answer: Your question is a fairly common one posed by Gen Xers, the oldest of whom turn 60 this year. We asked financial advisers to weigh in.
“Sixty is not out of the ordinary,” says Peter Palion, a certified financial planner with Master Plan Advisory in East Norwich, NY. “Sometimes people ask me if they can retire at 40.”
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Retiring at 60 could be doable with $750,000 in savings and a million-dollar home. Still, much depends on how many years of retirement you’ll need to finance and your expenses. Plus, you’ll need to bridge two big gaps: an income gap until you can claim Social Security or pension benefits and a health insurance gap until Medicare kicks in at age 65. Your home can be a huge help here.
Plan for a 30-year retirement — or longer
To get a better idea of what retiring at 60 would look like, you’ll need to run the numbers.
The first, but unknowable, number is how many years you’ll spend in retirement. A 60-year-old woman has a life expectancy of just over 86 years, or three years longer than a man of the same age, according to the Social Security Administration. But, if you’re in good health, the chance of a longer life may be higher than you think. One in three 65-year-olds may live to be at least 90, and one in seven could live to 95, Social Security estimates. That’s why many financial advisers recommend planning for at least a 30-year retirement, and preferably a few years more.
Next, add up your anticipated annual expenses in retirement.
“Expenses are a critical piece of the puzzle,” says Justin Pritchard, a CFP with Approach Financial, Inc., in Montrose, CO. “We can’t say for sure whether or not somebody can retire without knowing how much they spend, and that depends on things like where you live, your lifestyle, your health and other factors.”
Housing typically is a retiree’s top expense. You’ve paid off your mortgage —congratulations — but you’ll still have property taxes, homeowners insurance and maintenance. Also, total up annual payments on other outstanding debts, such as education and auto loans.
Some of your current expenses, such as commuting to work, will disappear, but others could increase. Your travel budget, for instance, might balloon.
And don’t forget health insurance, which can be pricey once your employer no longer shares the cost. Until you’re eligible for Medicare at 65, you may find affordable coverage if you can be added to a partner’s workplace health plan. Or you can also buy a policy through your state’s health care exchange and, depending on your income, may even qualify for a tax credit to lower your premium.
Once you have an idea of your yearly expenses, consider your sources of income. Many older retirees can rely on a pension, Social Security, or both to help with expenses, tapping savings to make up any shortfall.
But at 60, you’ll face some income challenges. Pension payments often start at 65, although some plans offer reduced benefits as early as 55. You can’t start Social Security retirement benefits until you reach 62, and even then, your payments will be reduced by as much as 30 percent compared to if you waited until your full retirement age of 67.
Pritchard advises delaying Social Security, if possible, until age 67 for a larger payout that won’t be reliant on market returns. “It’s government guaranteed. It has an inflation adjustment. And it’s also tax-favored. At least 15% of your Social Security is tax-free,” he says.
Whether you claim Social Security at 62 or later, you’ll likely need to draw down from your $750,000 nest egg to meet living expenses until benefits kick in.
How much can I safely withdraw from retirement savings?
The 4% rule was created decades ago as a guide to how much you can withdraw from your portfolio without running out of money during a 30-year retirement.
It works like this: You withdraw 4% from your nest egg the first year of retirement, and each year thereafter, you increase the dollar amount of your withdrawal by the previous year’s inflation. For example, with $750,000, you could withdraw $30,000 the first year. If inflation that year is 3%, the next year you would withdraw $30,900. And so on. The rule assumes your money is invested in half stocks and half bonds.
Some critics say 4% is too generous; others say it’s too stingy. Still, it remains a good starting point to see if your savings can support your early retirement.
Consult with a financial planner or adviser for a customized withdrawal rate, particularly if you’re delaying Social Security and might need to pull out a little more than 4% temporarily. You can also use our retirement calculator to see how much you need to save or a comfortable retirement.
Should I tap my home equity in retirement?
Your largest asset — the $1 million home — can be a crucial resource, and you have a few ways to tap that home equity.
You can, for example, free up money by selling your house and downsizing to a smaller place or one in a less expensive locale. You may owe capital gains tax on the profit from the sale. Taxes won’t be owed on the first $250,000 profit for single filers and $500,000 for joint filers.
Another option is to borrow against the equity in your home through a home equity line of credit, or HELOC. “I often recommend for younger folks to have a HELOC set up,” which they can tap for emergencies, says Greg Guenther, a financial planner with GRANTvest Financial Group in Matawan, NJ. He advises setting up the HELOC before you retire.
There are no restrictions on how you can spend HELOC money. Typically, you have 10 years to draw on the line of credit, at which time you will only need to pay interest on the amount you borrowed. After that, you’ll need to repay the loan with interest, but you can often spread the repayments over 20 years.
A reverse mortgage is another way to borrow against your home’s equity. You take the money in a lump sum, monthly payments or a line of credit. And as long as you live in the house, you won’t have to repay the loan or interest. You must be at least 62 to qualify for a federally insured reverse mortgage. The younger you are, the less you’ll be able to borrow.
Before you hitch your long-term retirement strategy to your home, consider your property’s climate risk. For example, if you are in an area prone to wildfires or hurricanes, you should be wary of potential property damage and insurance rate increases.
So, should I retire at 60?
Sometimes, the numbers don’t quite work without slashing expenses or adjusting your plans.
You might, for instance, need to delay retirement for a couple of years or so, allowing more time for your nest egg to grow and for you to qualify for Social Security.
You can also ask your employer if you could phase into retirement, say, by working three days a week. This would provide income and free up more time to enjoy some retirement activities.
If your employer isn’t open to that, you can retire and find part-time work or a side hustle elsewhere. Earning even $20,000 or $30,000 a year as a part-timer can improve your finances by reducing your nest egg withdrawals. “It’s really quite dramatic how that can impact things,” Pritchard says.
Plus, Guenther adds, “There are a lot of part-time employers that will offer health care benefits.”
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