Can I retire at 60? How to do the math

Peter Dunn | Special for USA TODAY

Dear Pete

My wife is 63 and retired. She has $1 million in her 401(k) and is not drawing from it. She is receiving about 4% return on this account. She receives $3,800 per month from her pension, for the rest of her life. I will not receive anything from her pension when she dies. She is currently not receiving Social Security because she is waiting until full benefit age.

I am 54, and I have $450,000 in my 401(k). My pension is currently valued at $275,000, and I make $202,000 per year gross. I max out contributions to my 401(k) each year, and my company matches at 7%.

We would like to have a combined income of at least $6,000 to $8,000 per month when I retire. I'd like to retire at 60. Can I?

Dave

Dear Dave: In a word, easily.

Of course, you will have some annoying little factors to consider such as inflation, taxes, market risk and various health care considerations. But in a nutshell, I want to live in your nutshell. It's a lovely nutshell with plenty of retirement income. Your goal of $8,000 per month of retirement income will be easily satisfied.

Follow this math. From a retirement income perspective, it takes about $2.4 million to generate the $96K ($8K per month) in retirement income you desire, using the widely accepted withdrawal rate of 4%. There's a pretty big debate going on in the financial world surrounding withdrawal rates. The low interest-rate environment that we've all enjoyed/hated has many experts concerned about the "4% rule." If it concerns you, use 3%. If you use a 3% withdrawal rate, you would need to have $3.2 million for retirement income-generation purposes.

It's an easy calculation.

Simply multiply your desired monthly income from your investments by 12 (months of the year) and then divide that answer by your preferred withdrawal rate. In this instance, I multiplied $8,000 by 12, which equals $96,000. Then, to determine how much of a nest egg is necessary to generate that income, I divided by 4% (assuming you are satisfied with risks associated with a 4% withdrawal rate). That's how I arrived $2.4 million. If you had no other sources of retirement income, you'd be wise to have at least $2.4 million set aside to consistently generate your desired $96,000 per year.

Here's the good news. You don't really need to generate $8,000 a month in income because you have several other income sources on the horizon: $8,000 minus $3,800 (your wife's pension), minus $2,000 (your wife's estimated Social Security payout at 66) = $2,200 in income you need to generate when you turn 60 and retire.

It only takes approximately $660,000 in retirement assets to generate $2,200/month (at a 4% withdrawal rate). You will have more than enough money.

It's worth noting, however, that at your wife's passing you may need to replace her pension income. Buying life insurance on her would be a good idea if you think you'll still need the $3,800 per month later in your retirement.

Your income is going to change tremendously over the next 16 years or so. You need a way to keep all the numbers straight.

Grab a piece of paper or spreadsheet and list your age and your wife's age across the top of the paper in various increments. For example, the first column should have your wife's age of 63 and your age of 54. The next column over should have your wife's age at 66 and your age at 57. Next should be her age 69 and your age of 60. Under each group of ages, list all the retirement income sources as they become available. For your particular situation, you will have several different income sources to start, and a couple to stop.

Your household income will increase when she achieves full retirement age of 66 (and a few months). It will decrease when you retire at 60. Your pension will kick in at 60 and you may choose to draw some income off of your investments as well. Then, your wife will have Required Minimum Distributions at age 70½ from any traditional 401(k)s and IRAs, assuming she isn't taking satisfying withdrawals at the time. That, too, will increase income for your household. At your age 67, your income will increase if you choose to take your Social Security at full retirement age. And then at your age 70½ you will be forced to take Required Minimum Distributions from any traditional 401(k)s and IRAs.

Based on only the information you provided me, you can easily retire at age 60. I just gave you the 30,000-foot view. Now meet with a financial adviser to get all the details exactly right.

Peter Dunn is an author, speaker and radio host. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com