So you've decided you'd like to retire a little early — "How much do I need to retire at 60?" is probably the foremost question on your mind. Without a crystal ball, however, it can seem impossible to determine just how much saving you'll need to do in order to enjoy a financially comfortable and fulfilling retirement.
Every retiree's specific financial needs will be different, as their retirement plans, physical health, location, support system and other factors all vary. But regardless of your exact circumstances, there are some important financial considerations you may want to include when figuring just out how much you'd need to retire at 60.
Your Current Retirement Savings
To determine where you want to go, you first have to know where you are. In terms of retiring at 60, that means calculating how much you already have saved for retirement. You can start by adding up the current totals in all of your retirement accounts, pensions and other investments.
With that number in mind, consider your plans for and leading up to retirement, including travel, up- or downsizing your living space, and taking up various hobbies, along with all their related costs or savings. Then calculate how much you can afford to withdraw annually from your retirement savings. You might plan to only withdraw from the potential growth of your investments each year to try and maintain the principal over the course of your retirement. If you've established diversified retirement income, you might instead choose to increase or even maximize withdrawals from one or more of your accounts.
But what if these strategies don't give you enough to live on each year? At that point, you could instead calculate how much annual income you'd want to count on in retirement and work backwards from there to figure out how much more saving you'll need to do to reach that desired amount.
This can give you an excellent number to shoot for, but there are other factors you then may want to consider as well.
Tax Considerations in Retirement
Retirement does not give you a reprieve from paying taxes, unfortunately. If you have tax-deferred retirement accounts, such as a traditional 401(k) or individual retirement account (IRA), then any withdrawals you make from those accounts will generally be taxed as ordinary income. And once you reach age 70½ (if you were born before July 1, 1949) or age 72 (if you were born after June 30, 1949), you'll need to take annual required minimum distributions (RMDs) — and pay ordinary income tax on those distributions. This means the amount of money in your tax-deferred accounts does not actually represent your spending power, since a portion of that money is effectively earmarked for the IRS.
In addition, up to 85% of your Social Security benefits may potentially be taxable, depending on your annual retirement income.
Taxes can come as an unpleasant surprise to a retiree who has not planned ahead for them. This is particularly important if you retire at 60, since an early retirement means more years' worth of living expenses to fund.
Social Security Benefits
Social Security is not available to early retirees until they reach a certain age. Specifically, the earliest you can take Social Security retirement benefits is age 62, which means you'll need to plan for at least two years of retirement income without the help of Social Security if you choose to retire at 60. It's also worth keeping in mind that Social Security benefits are never a guarantee.
However, you might consider waiting even longer to apply for Social Security, because your monthly amount is permanently reduced by as much as 30% if you take benefits before reaching your full retirement age, which is between 65 and 67, depending on the year you were born in. The closer you are to your full retirement age when you take benefits, the smaller your benefit reduction will be.
Waiting past your full retirement age is another possibility, as your monthly benefits will increase by 8% every year you delay taking them until you reach age 70, after which there will be no additional increases. Delaying your benefits can thus increase your guaranteed income for later in your life. Keep in mind that it also generally becomes much harder to find ways to cut back on spending or to go back to work if money becomes tight as you age, so the more you can increase your retirement income, the better your financial prospects are likely to be.
Health Care Costs
Medical costs are often the last thing on people's minds when they plan to retire in their early 60s. In that age range, most retirees are still young, vibrant and healthy, so health care can seem like a matter of relatively small concern. But according to recent estimates, the average person will spend $122,000 to cover health care costs from age 70 on, most of which will not be covered by Medicare.
So it pays to save up for health care costs, even if you don't retire until 65. But retiring at 60 means having a long five-year wait for Medicare eligibility, which can affect your retirement plans if you happen to get sick before you hit your 65th birthday. Keep in mind that through the Affordable Care Act, young retirees can purchase health care coverage in the insurance marketplace to help bridge the gap until Medicare eligibility.
Workers can also set money aside in a Roth IRA to cover potential medical expenses in retirement. Since Roth IRAs are funded with after-tax earnings, withdrawals are tax-free — as long as you've held the account for at least five years and have reached age 59½. Any withdrawals before that cutoff will be charged a 10% penalty fee. As you can access your Roth money without paying additional taxes, these accounts can provide one way to save money for potential medical expenses. Also, if you don't need to access the money for health-related expenses, there's no required minimum distributions for Roth IRAs, meaning the account can continue to grow throughout your retirement (although, as an investment, it can also lose value).
Though the financial specifics of retirement will look different from one early retiree to the next, everyone who wants to leave the work force and enjoy the next chapter of life at age 60 will want to consider their retirement savings, taxes, Social Security and health care costs before taking the plunge. Consider meeting with a financial professional to determine a retirement strategy in line with your financial goals.