Is $1.5 Million Enough to Retire at 62?

Determining if $1.5 million is enough for retirement is highly individual, depending on desired lifestyle, health, and various financial considerations. This article provides a framework to help assess your unique situation.

Estimating Retirement Living Expenses

A fundamental step in retirement planning is constructing a realistic budget for your post-work life. This requires categorizing anticipated expenditures into essential (housing, food, utilities, insurance) and discretionary (travel, hobbies, entertainment) spending.

Spending patterns frequently shift in retirement. Commuting costs and work-related attire expenses usually decrease. However, healthcare spending tends to increase with age. Some retirees might experience a temporary surge in leisure spending, particularly for travel, which often moderates later. Accurate projections require considering potential future lifestyle adjustments. American households headed by someone 65 or older spent an average of $60,087 in 2023.

Identifying Additional Income Streams

Beyond a personal investment portfolio, other income sources can contribute to retirement funding. Social Security benefits are a primary component for most retirees, calculated based on an individual’s earnings history. The Social Security Administration provides online tools, such as the Retirement Estimator on SSA.gov, or a “my Social Security” account, to project benefits and compare claiming ages.

Other potential income sources include traditional pensions from former employers, offering a defined benefit stream, or annuities purchased from insurance companies, providing guaranteed payments. Some individuals may also choose part-time work during retirement to supplement income.

Crucial Financial Factors for Longevity

Several external financial factors influence how long retirement savings will last. Inflation, the gradual increase in the cost of goods and services, erodes purchasing power and should be accounted for in long-term financial projections. An average inflation rate around 3-4% can diminish the real value of a fixed income or static savings.

Investment growth is vital in sustaining a retirement portfolio, though expectations for returns should remain realistic. Historically, the S&P 500 has delivered an average annual return of about 10%, but this figure reduces to approximately 6% to 7% when adjusted for inflation. Asset allocation, balancing investments between stocks, bonds, and other assets, influences both potential growth and inherent risk. Higher returns are never guaranteed, and market fluctuations can impact portfolio values.

Healthcare costs represent a significant and often unpredictable expense in retirement. While Medicare provides coverage for those 65 and older, it does not cover all medical expenses, leaving out-of-pocket costs for premiums, deductibles, and uncovered services. A 65-year-old retiring in 2025 might anticipate spending around $172,500 on healthcare throughout retirement, not including long-term care. Life expectancy also plays a role, as personal and family health history informs how many years funds are needed.

Evaluating Your $1.5 Million

Bringing together estimated expenses and other income streams helps evaluate the $1.5 million portfolio’s sufficiency. A common guideline in retirement planning is the “safe withdrawal rate,” a percentage of the initial portfolio balance that can be withdrawn annually, adjusted for inflation, without depleting funds over a typical retirement period. The 4% rule, derived from historical market data, is a widely referenced starting point, suggesting an initial 4% withdrawal, followed by inflation adjustments, could sustain a 30-year retirement. However, some studies suggest a more conservative rate, perhaps closer to 3.7% or 3%, might be more appropriate given current market conditions.

To apply this, subtract your estimated annual income from Social Security, pensions, or part-time work from your total estimated annual living expenses. The remaining amount is the annual withdrawal needed from your $1.5 million portfolio. For example, if annual expenses are $70,000 and other income is $30,000, you would need to withdraw $40,000 from your investments. This $40,000 withdrawal from a $1.5 million portfolio represents a 2.67% withdrawal rate, generally considered sustainable. Evaluating this percentage against established safe withdrawal rates helps project how long the $1.5 million might last under various market conditions and inflation scenarios.

Age-Specific Considerations for Retiring at 62

Retiring at age 62 introduces specific financial implications. The earliest age to claim Social Security benefits is 62, but results in a permanent reduction in monthly payments compared to waiting until your full retirement age (FRA). For individuals born in 1960 or later, the FRA is 67. Claiming at 62 can result in a benefit reduction of up to 30%. This reduction also affects future cost-of-living adjustments (COLAs).

If you claim Social Security at 62 and continue to work, benefits may be subject to an earnings test. For 2025, if you are under your FRA for the entire year, $1 in benefits is withheld for every $2 earned above an annual limit of $23,400. This earnings test ceases to apply once you reach your full retirement age.

A significant consideration for retiring at 62 is the healthcare coverage gap before Medicare eligibility at age 65. Options to bridge this three-year period include utilizing COBRA, allowing continuation of employer-sponsored coverage for up to 18 months, typically at full cost plus an administrative fee. Another common option is purchasing plans through the Affordable Care Act (ACA) marketplace. ACA plans do not deny coverage for pre-existing conditions, and income-based subsidies may be available to reduce premium costs. A 62-year-old might pay an average of $1,116 per month for a silver-tier ACA plan without subsidies in 2025. Spousal coverage, if available, can also be a cost-effective alternative.