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Strong strategies for funding a retirement at age 60

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If you're like many people, you can't wait for the day when you can shift your focus to things you're truly passionate about—whether it's delving into a hobby or giving back to your community. To that end, you may have asked yourself: Can I retire at 60? Being able to leave the workforce sooner could give you more time to pursue those goals.

Winding down your career early is an ambitious goal, but it's certainly within reach if you have strong investing habits and a prudent financial plan. Here's how to identify your target savings amount and create a strategy to get there on your timeline.

How to anticipate your retirement costs

Retiring at 60 means you could be looking at a retirement that lasts four decades or more if you're in good health. How can you feel confident that you'll have enough assets to last as long as you need them to? The first step is getting a clear sense of your post-retirement expenses.

If you plan on making modest adjustments to your current lifestyle, that process is decidedly simpler. You can take your current budget and adjust for any expenses you expect to forgo in retirement—such as your daily commute—while adding the cost of any new hobbies or other expenses you plan to incur.

If you have more dramatic plans, like moving to a new part of the country or starting a new business, then projecting your expenses in a more comprehensive way may be the best way to realistically estimate your budget. That means tallying every major expense category, including housing, utilities, clothing and even vacations. Don't forget to account for inflation, especially if age 60 is still a long way off. It's the cost of living when you retire that matters—not what you pay in today's dollars.

If you are married, be sure to include timing of retirement for each of you. If one of you continues to work, that decision will impact Social Security and the amount needed to budget for both of your visions for retirement.

Costs to consider when planning to retire at age 60

As you add up your total outlays during retirement, make sure to include the following:

  • Debt payments. It's generally a good idea to pay down credit card balances and other expensive forms of debt before retirement. If you plan to continue paying down other debt, such as a mortgage or auto loan, include those payments in your projected budget.
  • Health care costs. You won't become eligible for Medicare until age 65, so you'll likely have to cover the full cost of health care coverage for the first few years of retirement. Even when you reach Medicare age, the median retiree spends $4,311 a year on out-of-pocket medical expenditures. A solid financial plan accounts for those potential expenses even if you appear in good health now.
  • Charitable gifts. Part of living a vibrant, rewarding retirement is having the ability to give back to the communities you love. If supporting your church or a nonprofit charity is important to you, create room for it in your retirement budget.
  • Taxes. One of the biggest expense categories in retirement often goes overlooked: taxes. Depending on your benefit amount and income from other sources, as much as 85% of your Social Security payment may be subject to income tax. Although you can make qualified distributions from a Roth account tax free, traditional 401(k) and IRA withdrawals are taxed at your ordinary rate.1

Predict how much money you will need by age 60

Once you have a sense of your eventual budget, the key question becomes whether you'll have enough assets to cover your expenses well into the future. Start by tallying any guaranteed sources of income, like pensions, annuities and Social Security.

Know your Social Security claim timeline

You may need money from your investment accounts to fill in any income gaps, which can be significant when you exit your career at 60. You can claim Social Security as early as age 62, but you won't qualify for your full benefit amount until age 67 (you can boost your payout even more by waiting until 70). Therefore, this retirement timeline may require drawing on your retirement funds at a faster pace than traditional retirees.

Plan your withdrawal rate

To determine if you'll have enough assets to last, identify a safe investment withdrawal rate in retirement. Historically 4% has been determined as the optimal amount to withdraw and have your money last throughout retirement. Several factors can affect that rate such as asset allocation, risk tolerance and amount withdrawn annually. That assumes you keep a balanced portfolio in diversified stock funds, with the remainder going toward bonds.

Plan for longevity

If you're retiring in good health at age 60, you may need your assets to last up to 35 or even 40 years. In this case, you'll likely want to adjust your withdrawal rate closer to 4% in your first year after leaving full-time work. If withdrawing that amount gives you plenty of room to cover your after-retirement budget, it's a sign that you may be in good shape to exit your job early.

Plan how will you fund your retirement

Tax-advantaged accounts like IRAs and 401(k)s offer a great way to balance when your funds are taxed—especially if your employer offers a matching contribution. If you hope to be an early retiree, it pays to think about how to use investment vehicles in a way that fits your unique goals.

Build in tax efficiency

If you're preparing to retire as early as age 60, you likely make a higher-than-average salary now and have more to save. However, your taxable income will likely drop dramatically once you leave the workforce. It may make sense to invest through traditional 401(k)s or IRAs in order to make tax-deferred contributions during your working years—when you're in a higher tax bracket—and pay a lower rate on withdrawals once you retire.

Often, this results in a lower tax bill for early retirees compared with contributing to a Roth version of these accounts, which ask you to invest after-tax dollars in exchange for tax-free withdrawals in retirement. Roth options can be great when you're early in your career and expect to be taxed at a higher rate in retirement; they're generally not as beneficial if you're in the opposite situation.

Take advantage of Roth IRA tax rules

That doesn't mean that Roth IRAs shouldn't play a part in your savings strategy. There are benefits to balancing when you pay taxes on your investments. In order to take advantage of this additional tax deferral, you can convert part of your traditional 401(k) or IRA to a Roth IRA once you retire. You'll have to pay income tax on the amount of the conversion, but when you leave your job you'll likely find yourself in a lower tax bracket. As long as you own the account for more than five years and are over age 59½, you can make tax-free withdrawals from your Roth account and avoid required minimum distributions (RMDs).

In fact, having different income "buckets" from which you can draw in retirement—a combination of pretax and Roth accounts, for example—can be an effective way of minimizing your long-term tax liability. A tax professional can help you create a personalized strategy based on your current income level and retirement goals.

Make every effort to save aggressively

Figuring out how to retire at 60 requires careful planning and, in most cases, certain sacrifices as well. Here are some of the steps you can take to keep on track:

  • Make saving a priority. The general rule is to aim to put away roughly 15% of your salary, including any employer matches. However, that axiom is designed for those who start saving in their 20s and retire in their mid- to late 60s. If you're planning to leave the workforce several years earlier than at, you'll need to boost your savings rate accordingly. Make sure you're investing enough to maximize any matching funds from your employer, which can significantly increase your balance over time.
  • Generate extra income. With all of the other expenses you may be facing, investing more than 15% of your income could present a challenge. If you're having trouble reaching that mark, consider additional sources of income that you can put toward your retirement fund, such as side jobs or passive sources of income.
  • Adjust your current lifestyle. The more you can reduce your monthly expenses, the more you'll be able to save. Living in a more affordable neighborhood or taking public transportation to work, for example, can free up income that you can then invest in your future self.

Before you're 60, stress-test your plan

In advance of making the jump into retired life, consider adjusting to part-time employment or doing a trial retirement to stress-test your plan and make sure it's the right move for you. This involves accruing as much time off as you can and then taking a long break from your job as you get within a year or two of your desired retirement date. During that time, have your paycheck deposited into a bank account where you won't touch it. Instead, live off of your investment accounts. Just keep in mind that, if you're not yet 59½, you'll want to avoid pulling from any accounts that will trigger an early withdrawal penalty. Importantly, you'll want to withdraw money at the same rate you would during your actual retirement.

This can be a good opportunity to test whether you can live comfortably on your current assets; if not, it signals that you may need to continue building your nest egg. You can also use your trial experience to see if you enjoy life outside of work as much as you thought you would.

One thing is for certain: Retiring early is a major decision that requires plenty of thought and planning. If you're wondering whether you're ready financially, connect with a local Thrivent advisor, who can gauge your post-career expenses and help you determine whether you have enough assets to live the retirement lifestyle you envision.

1 Distributions of earnings are tax-free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.