We Have $1 Million in a 401(k) and Fully Own Our $500k Home. Can I Retire in 5 Years at 60?

With $1 million in a 401(k) and no mortgage on a $500,000 home, retirement at 60 may, in fact, be possible. However, retiring before eligibility for Social Security and Medicare mean relying more on savings. So deciding to retire at 60 calls for careful planning around healthcare, taxes and more. At any age, deciding whether you can retire comes down to weighing your assets against your expenses.

Do you have questions about retirement planning? Speak with a financial advisor today.

Retirement Decision Basics

The first step in deciding if you can retire at 60 is understanding your financial situation. Important factors include your assets like retirement accounts, other savings and home equity. Your expenses also matter, from basics like housing and food to discretionary costs for travel. Comparing your income sources to your costs reveals whether you need to adjust your savings rate or can retire comfortably.

It’s also key to understand how retirement age affects your future income and expenses. For instance, you aren’t eligible for Social Security until age 62. Also, while you can technically claim benefits at 62, waiting until your full retirement age of 67 or even until 70, boosts your monthly benefit significantly.

Retirement age also can greatly affect healthcare costs. That’s because retiring before 65 means paying for five years of private health insurance until Medicare eligibility.

Retiring by 60

American workers typically retire around ages 64-67. Retiring early at 60 requires diligent preparation, but isn’t impossible. First, understand the rules around retirement accounts.

With a 401(k), you can take penalty-free withdrawals starting at age 55 if you leave your employer. However, you’ll still owe income tax on withdrawals. It’s wise to delay drawing down retirement savings as long as possible, so your investments keep growing.

Second, realize you’ll need to self-fund healthcare until Medicare at 65. In turn, you’ll need to budget for five years of individual coverage or COBRA. If you have health issues, delaying retirement to keep work-based insurance may be safest.

Third, while you can claim Social Security at 62, your benefit will be permanently reduced versus waiting. If you delay until your full retirement age, your check will be approximately 30% higher. Waiting until 70 maximizes it even further to 132%. If you can afford to wait, many experts recommend doing so.

If you have a mortgage, consider paying it off before retiring at 60. If you’ve paid off your home, that’s one less expense to worry about after you’re living on a fixed income, notes Alec F. Root, CFA and research analyst at DBR & CO.

“Generally speaking, it is not imperative to pay off your mortgage in full before retirement, but it does make a difference,” Root said to SmartAsset. “The primary reason is that if you own your home outright, then you are eliminating an annual expense of $30,000 to 40,000 or more during retirement. Without this expense, there is less need to draw from your assets and/or income sources, which helps preserve your assets over the duration of your retirement.”

Consider matching with a financial advisor if you’re interested in professional advice for your situation.

Retiring at 60 in Action

A hypothetical example can show how all this might work. Consider a married couple, both 55 years old, with $1 million in 401(k) accounts and a paid-off $500,000 home. They make $150,000 a year combined and spend $80,000 annually. They have 10 years until age 65 and Medicare eligibility, but would like to retire by age 60.

Using the 4% withdrawal rule, a common guideline, their $1 million 401(k) could safely provide $40,000 income annually before taxes. They could cover the resulting $40,000 shortfall by increasing their withdrawal rate to 8%. This would, however, increase the chances they’d run out of money in retirement.

Two years after retirement, at age 62, they could claim Social Security benefits. Assuming they each received the average benefit of about $1,800 monthly, their combined Social Security benefit would be $43,200. They could then reduce their 401(k) withdrawal to the 4% safe rate or slightly below.

They’d need to budget carefully for healthcare, likely buying an individual policy costing $1,000 per month for them both until Medicare eligibility at 65. Taxes will also take part of their income from withdrawals and Social Security, but early retirement appears feasible with their assets. They could also trim spending or earn income from part-time work.

Making the Call

Every individual retirement plan is different. Strategies for deciding if you can plan to retire early include:

No matter how well laid out your early retirement plan is, risks remain. For instance, retirement costs may exceed projections due to inflation or healthcare needs. Another possibility is that an extended period of underperformance could jeopardize portfolio sustainability. Surprise costs, such as unexpected home repairs, can strain budgets, Root notes.

“Some of the major costs to budget for after paying off a home include general maintenance and repairs, larger projects such as a new roof or new floors, or a bathroom or kitchen renovation, and property taxes,” he said.

Remember, a financial advisor can help you make projections based on your circumstances and weigh your options for retirement.

Bottom Line

While retiring at 60 takes diligent preparation, for some it can become reality. The key is understanding your income sources, estimating expenses accurately and planning for risks like healthcare costs pre-Medicare. Paying off your home before retirement also helps.

Retirement Planning Tips

• A financial advisor can help you build a retirement plan for the future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s retirement calculator to see how retirement-ready you are. Try it today.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

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