I Have $640k in an IRA and Will Get $1,900 in Social Security. Can I Retire at 65?

How old are you?

When it comes to evaluating your retirement options, this might be the single most important question in finance. Your age will determine how close you are to needing this money which, in turn, will change almost everything about how you evaluate your taxes, returns and other options.

For example, say that you have $640,000 in an IRA and can expect about $1,900 per month in Social Security benefits. Is this enough to retire on at 65? The answer is… it depends.

A financial advisor can help you develop a retirement plan suited for your wants and needs. This tool can match you with up to three fiduciary financial advisors for free.

Likely Pre-Tax Earnings

First, let's look at your potential earnings pre-taxes.

Entering Retirement

Say that you're currently 65 and want to get out of the office today. At age 67, we would assume a 4% annual withdrawal from your IRA, so the equivalent might be a 3.7% withdrawal at age 65. Using those assumptions, your income might be:

• Benefits – $22,800 per year

• Portfolio, 3.7% Withdrawals – $23,680 per year

• Total – $46,480 per year, inflation adjusted

Or you might invest in an annuity. In that case, based on a representative annuity, your income might be:

• Benefits – $22,800 per year

• Annuity – $49,476 per year

• Total – $72,276 per year, partially non-inflation adjusted

The annuity can generate significantly more income, but be careful. You will need to invest a significant portion of this money as a hedge against inflation, otherwise your spending power will drop significantly over your retirement. Consider speaking with a financial advisor about your investment options and how they could help support your retirement.

Pre-Retirement

On the other hand, say that you're currently 55 and just want to plan for a slightly early retirement. Again, let’s assume a 3.7% withdrawal rate, but we also need to account for ongoing portfolio returns and contributions. That introduces many more assumptions.

For example, say that you contribute 10% of a median $75,000 income into a portfolio generating a median 8% rate of return. You might expect:

• Benefits – $22,800 per year

• Portfolio at 65 – $1.49 million

• Portfolio 3.7% Withdrawals – $55,130 per year

• Total – $77,930 per year, inflation adjusted

Or, with a representative annuity your income might be:

• Benefits – $22,800 per year

• Annuity – $85,956 per year

• Total – $108,756, partially non-inflation adjusted

Things can get complicated when you account for inflation, taxes and your expected lifespan. A financial advisor can help you do the calculations for your portfolio.

Tax Analysis of Your Earnings

The next step is to understand how taxes will affect your earnings.

With an IRA, your earnings, whether portfolio or annuity, will be subject to full income taxes. Your Social Security benefits, in turn, will be taxed based on those earnings.

Social Security benefits are taxed at a series of flat rates based on an adjusted version of your overall income known as your "combined income." Combined income is, approximately, half of your benefits plus all of your other income subject to income taxes. Then, your benefits are taxed based on your combined income. For an individual in 2024 the tiers are:

• 0% – Less than $25,000

• Up to 50% – Between $25,000 and $34,000

• Up to 85% – More than $34,000

Each tier represents the amount of benefits subject to income taxes. For example, say that your combined income is more than $34,000. In that case, you would add 85% of your Social Security benefits to your taxable income for the year, leaving 15% untaxed.

Here, depending on your age and investment strategy, you will likely pay taxes on 85% of your benefits.

Then we look at your other sources of income. All of these options will be subject to income taxes, although it will depend on your specific amounts. For example, say that you are currently 65 and will take 3.7% from your portfolio each year. You would have likely after-tax earnings of:

• Combined Income = 0.5 * Benefits + Withdrawals = 0.5*$22,800 + $23,680 = $35,080

• Benefits Tax Rate = 85%

• Taxable Income = 0.85*Benefits + Withdrawals = 0.85*$22,800 + $23,680 = $46,060

• Federal Income Taxes = $3,285

• After Tax Income = $22,800 + $23,680 – $3,285 = $43,195

Under a 3.7% withdrawal strategy, if you are currently 65, you can estimate $43,195 per year of after-tax income if you retire right now.

On the other hand, say that you're 55. In that situation, we assume $55,130 per year with a 3.7% withdrawal strategy. In that case, we can estimate after-tax earnings of:

• Combined Income = 0.5 * Benefits + Withdrawals = 0.5*$22,800 + $55,130 = $66,530

• Benefits Tax Rate = 85%

• Taxable Income = 0.85*Benefits + Withdrawals = 0.85*$22,800 + $55,130 = $74,510

• Federal Income Taxes = $8,653

• After Tax Income = $22,800 + $55,130 – $8,653 = $69,277

Under a 3.7% withdrawal strategy, if you are currently 55 and looking to retire a little early, you can estimate an after-tax income of $69,277 per year.

While this is not comprehensive, it is representative. Make sure to account for taxes as you estimate your retirement budget. You can get matched with a financial advisor for help with tax projections and strategies.

Roth Management Options

Here, a partial Roth conversion might be helpful.

One of the best ways to manage taxes in retirement is with a post-tax Roth IRA. Withdrawals from this portfolio are tax-free under the right circumstances. This lets you keep all the income and, since Roth withdrawals don't contribute to your combined income. It also reduces your Social Security benefits taxes.

The downside is that you have to pay taxes up front. When you make a Roth conversion, you add the entire amount of the conversion to your taxable income for that year. So, for example, say that you convert your $640,000 IRA to a Roth portfolio in equal stages over 10 years. Disregarding portfolio growth over that time, you would add $64,000 per year to your taxable income, for a minimum of $6,341 per year of conversion taxes.

If your tax rate pre-retirement is lower than your expected tax rate in retirement, this might be a good strategy. It isn't always worth the cost, but it’s likely worth reviewing whether a Roth conversion can help you.

The Bottom Line

Before you make any retirement plans, make sure you review the tax implications. Even retiring a little bit early at 65 can change your options considerably.

Roth Conversion Tips

• After. Sixty. This is one of the biggest issues when it comes to a Roth conversion, are you before or after 60. It can change your cost benefit analysis completely. 

• A financial advisor can help you build a comprehensive retirement plan. 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.

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