Have you ever wondered, "How much do I need to retire at 62?" While the "full" retirement age is currently 67 for anyone born in or after 1960, there are any number of reasons you might choose to retire earlier — from eagerness to jump-start your retirement or concerns about your health to the need to take care of family.
While five years may not seem like a big difference in terms of retirement, there's some important planning involved in determining whether you can afford to retire at 62 (and stay retired). Knowing you won't outlive your savings after an early retirement is important — but how do you figure out just how much money you'll need?
The answer can depend on a number of factors. It can be helpful to start by considering how your current savings measure up to the financial factors most likely to affect your retirement income needs.
Current Retirement Savings
To know how much you need to retire at 62, you'll want to start with a clear picture of how much you've already saved up. You can start by adding up all of your retirement accounts, pensions and other investments, then figuring out how much you could afford to withdraw annually. You might consider setting up an annual withdrawal to take only from your accounts' growth in order to maintain the principal over the years.
If only withdrawing the possible growth in your accounts' value doesn't provide you enough to live on, you could instead start from the opposite direction, by calculating how much you'll need to live on each year. Then you could work backwards to figure out how much more savings you'll need to reach your annual income goal.
Health Care Costs
It's important to factor the cost of health care into your retirement plan, as Medicare may not cover all of your needs. According to recent estimates, the average person will spend $122,000 to cover health care costs from age 70 on. This number also doesn't account for the medical costs you as a 62-year-old retiree might face during the gap between the start of your retirement and Medicare eligibility.
So how can you afford health care if you retire at 62? There are several options available. First, the Affordable Care Act lets young retirees purchase health care coverage through the insurance marketplace, potentially allowing them to bide their time until reaching Medicare eligibility.
Additionally, if you're in good health, you might consider setting money aside in a Roth individual retirement account (IRA) to cover potential medical expenses. Roth accounts are funded with money that has already been taxed, which means you can later access it tax-free, provided you hold the account for at least five years and reach age 59 1/2 before making a withdrawal. This could make a Roth IRA a source for funds that could be accessed in case of medical expenses (again, provided you've held the account for at least five years). If you continue to enjoy good health, there's no required minimum distribution on Roth IRAs, which means they can continue to grow and increase your total savings if you don't tap the funds they contain (although, as investment-based accounts, they could also lose value).
Social Security Benefits
You may already be aware that Social Security benefits are available to retirees as young as 62. However, there are reasons to consider waiting a little longer to take your Social Security benefits, if possible.
For one thing, your Social Security benefits will be permanently reduced by as much as 30% if you take them early. The closer you are to your full retirement age when you start taking benefits, the smaller your benefit reduction will be. And if you can wait until after your full retirement age (which is typically between 66 and 67, depending on your birth year), your monthly benefits will increase by 8% every year you delay taking them until you reach age 70.
So why does this matter if you're going to retire at 62 anyway? Putting off taking your benefits means you may be able to increase your potential income for later in life. When you're in your 70s, 80s or 90s, it will likely be much harder to find ways to cut back, make do or even go back to work if money ends up tight. The more you can increase your retirement income, the less likely you are to run low on money as time goes by. It's also important to remember that the Social Security asset reserves could end up completely depleted as soon as 2034, meaning you may not want to factor Social Security income into your long-term retirement plans at all.
Tax Considerations for Retirement
Any money you've set aside in tax-deferred retirement accounts (e.g., 401(k) plans or traditional IRAs — but not Roth IRAs) will be taxed as ordinary income any time you make a withdrawal. You'll also be required to take minimum distributions each year once you reach age 70 1/2 (again, not on Roth IRAs), which means you won't necessarily get to choose how much money to access (and how much to pay in taxes) once you're in your 70s.
Many retirees are also unaware that up to 85% of their Social Security benefits could be taxable, depending on their total annual retirement income. This is why it's vital to calculate your tax burden in retirement so you're not counting on money that you may actually owe the IRS.
The exact financial situation required to retire comfortably at 62 varies from person to person. Figuring out what might work for you means determining how much you have saved, then factoring in taxes, health care costs and the costs of waiting for Social Security. You might also consider speaking with a qualified financial adviser to help determine a retirement savings strategy that fits your overall financial goals.