I’m 57 with $700k: Can I Retire Early With My 401k and Social Security?

By Troy Sharpe CFP®, CPWA®, CTS®
Reviewed by Nathan Kattner
Updated: 03/28/2024

You’re 57 years old, have $700,000 saved for retirement, and you’re pretty much done with work, you want to retire, but the question is, can you retire? How much can you spend when do you take Social Security and what about that pesky 10% early withdrawal penalty? Because you won’t be 59 and a half for two and a half more years. We’re going to go through all the analysis, look at the pros and cons of different decisions, and most importantly, how they impact your ability to maintain your quality of life throughout retirement.

Understanding Life Expectancy and Social Security

As usual, we’re going to start with some of the base parameters, so you have some context regarding this hypothetical financial planning, retirement planning case study.
Husband and wife 57 and 57, age 88 is the life expectancy for him and age 90 for her. Now, when you look at some of the life expectancy statistics and you take out people who pass away early, babies, people in their teenagers, 20s, 30s, 40s, once you make it to age 65, if you’re female, your life expectancy is about age 88. If you’re male, your life expectancy is about age 83, 84. This is 30 years into the future, the trend is pretty clear that life expectancies are increasing.
We’re going to use 88 and 90 and I feel that’s a pretty comfortable estimate when it comes to planning. Again, we’d much rather plan for a little bit longer than a little bit sooner, and that’s the right thing to do. Social Security, 3,000 a month at full retirement age for the husband and 0 per month for the spouse here. She will end up taking spousal benefits, which if they defer until full retirement age, which is age 67, she would be entitled to 50% of his benefit or 1,500 per month.
Now, in this scenario, we’re going to look at what happens if we take Social Security sooner. Because if you’re 57 and you want to retire, you’re probably thinking, “I just need to get to 62 so I can turn that Social Security on and then reduce the amount I need to withdraw from my portfolio.” We’re going to look at taking into 62 versus 67 and see how that impacts the longevity of your portfolio.

Dynamic Income Planning Beyond the 4% Rule

Here’s the one where I think this is really interesting because we build dynamic income plans for clients. The goal here is 50,000 per year and what makes this interesting is this is far more than what you maybe have heard with the 4% rule. 4% rule just simply says, take 4% out of your portfolio at retirement adjusted annually for inflation and you should be okay. I think the numbers are about a 90% probability of not outliving the money. That’s a general rule of thumb.
We don’t recommend following general rules of thumb because if you have a more dynamic approach and you’re connected to your plan and you have visibility into how the decisions you’re making today are impacting your long-term security to make sure that you’re okay, to make sure that the people you love are taken care of. When you have this type of visibility through planning, you can make dynamic adjustments on a year-to-year basis as far as how the portfolio is managed, how much income you’re withdrawing, where you’re withdrawing that income from.
We’re going to challenge some conventional wisdom here and show you a $50,000 income plan when the assets are only 650,000 inside the IRA and 50,000 inside the non-qualified account. If we were going to take 4% of a combined $700,000 of retirement balance, that’s only 28 grand. If you’re in this situation, you may be thinking, “I can never retire. I have to keep working. I’ll probably be slaving away until I’m age 65.” When the truth of the matter is, it’s quite possible as you may be able to retire much sooner than you are currently thinking.

Simulating Retirement Scenarios: A Thousand Trials

We’re going to jump right to it based on the parameters that I’ve shared with you already. We’re going to run a simulation, which is 1,000 different trials. This is going to look at different rates of return of the portfolio hypothetically over the course of the projected lifespan. Here we see all what we call the squiggly noodles and each one of these little noodles represents a potential different path, so different returns in the portfolio over time. We can see as usual in the beginning, you could be going down one of these upper noodles and/or down one of these lower noodles. it’s important to understand that usually within the first three, five, six years of retirement, whether you’re making good decisions or bad decisions, it’s not quite visible unless you are connected to a plan to see if you’re on the right path or possibly on the wrong trajectory.
We see some of these plans here. Okay, we end up passing up with 687,000, 460,000, some of these up here 2.3 million, 2 million. A lot of different potential paths that you could go down, but we do see when we look at the probability of success of these 1,000 simulations, about 980 of them or 98%. When you hit life expectancy, you pass away with money.
Two things. Some of you may be thinking, what is the rate of return that we’re looking at as far as this projection is concerned? 5.31, that would be net of all fees, net of all expenses, and all that. Just 5.31% is the hypothetical average rate of return for this case study. Sequence of returns is far more important in retirement than the average rate of return. All that is, is the combination of taking withdrawals and market losses at the same time. Average rates of return aren’t as important as they are in the accumulation phase, but for the purpose of this discussion, because I’m not going to go down that rabbit hole, we do have a lot of good videos about sequence of returns risk on the channel here, so I encourage you to check one of those out, but 5.31%.
Second thing, some of you may be thinking that 50,000 from 700 grand, that’s far too much to be taking from my portfolio, you should never take 4%, and I’m sure I’ll get some comments about this video telling me that I’m crazy. The truth is, when we’re looking at all sources of retirement income, and we’re projecting out your spending goal over time with respect to inflation, and not even reducing it, your spending goal as you get into your 70s and 80s and beyond.
When we look at all sources of retirement income, we see that the red represents the shortfall that we would have to withdraw from once we retire, that’s that $50,000 spending goal. We would want a strategy of where we’re taking that money from, the IRA, the non-IRA, are we doing any Roth conversions, how is the money being invested, dividends, interest, we want all that to be balanced and to come together.
We do see, if we defer Social Security to full retirement age, that this dotted line right here, that is the $50,000 spending goal increasing with inflation. It’s about a 2.5% projected inflation rate, which is above the Federal Reserve’s mandated 2% target. Does it mean inflation’s going to be at 2% forever, or 2.5%? We don’t know. We have to make some assumptions when it comes to inflation. If the Fed tells us that their monetary policy is structured so that the long-term target of inflation in this country is 2%, assuming a 2.5% rate over a 30-year period, it’s probably a fairly decent estimate. We see at age 67, our estimated Social Security benefit is enough to cover our projected spending goal.

Sequence of Returns Risk: Navigating Market Volatility

I touched on sequence of returns risk. This is the biggest risk you face in this particular hypothetical scenario in the first few years of retirement. We’re going to look at what happens if it is bad timing when you retire. Down. The portfolio loses 20% in the first year, 7.5% year two. I’m going to make this a little bit bigger just so you can see it better. The green line is what we just looked at, the 98% probability of success. We start with 700,000. Because we’re deferring Social Security until full retirement age, we are distributing from the nest egg. We are decumulating assets that we’ve saved, but we’re connected to the plan. We have visibility. We know that our projected spending needs will be met fully by Social Security based on what we’ve looked at so far.
It spends down. Social Security covers most of everything. Our assets build back up. At the low point here, we get to about 383,000. It might be a little scary. This is why a lot of people really want to turn Social Security on sooner. Again, without going too far down this rabbit hole, the one thing that I would encourage you to look at is, what value does that guaranteed lifetime income stream actually represent? Meaning, would you rather have $383,000 and let’s say 60,000 of guaranteed lifetime income, or would you rather have $500,000 and maybe $40,000 of guaranteed lifetime income?
You have to assign a value to that amount of guaranteed lifetime income, and that is part of your overall value in retirement when making these decisions. I hope that was clear.

Impact of Social Security Timing on Portfolio Longevity

Okay, now, bad timing. Here, this is the risk of retiring soon, suffering some losses in the first couple years of retirement and deferring Social Security. We get all the way down to $73,000. Somewhere around probably year one of retirement or year two of retirement, you’re starting to think about going back to work, really concerned you made a bad decision, probably realizing that you’re not able to get paid the same amount of money as you were making prior to retirement, at least that’s been our experience. We see that a lot with people who retire and then decide to go back to work for whatever reason.

If you were to continue along this course, you see what type of impact that sequence of returns, a bad timing event could have on your security, your mental health, your overall quality of life, because now instead of being retired, now you’re probably really going back to work. Almost certainly in this scenario, if you’re committed to staying in retirement, you’re probably turning Social Security on. That’s absolutely the biggest risk that you would face in this hypothetical scenario if you retired at 57 with about $700,000. What I want to do next is look at what happens if we take Social Security sooner at age 62? How does that impact the longevity of the plan, our ending balances compared to here, and also how does it impact us in this worst-case scenario of a bad timing event? One last thing to provide some context. If we look at an analysis of the individual trials, so we see here we have quartiles, essentially, of potential outcomes of everything that we’ve looked at so far, taking Social Security at full retirement age. We see the end of plan future dollars. If we look at the 75th percentile to the 25th percentile, we see 2.3 to about $800,000. That’s a range of expectation, reasonable expectation, of the amount of money you’d have left at life expectancy.
Future dollars, very key term here, because when we actually discount that to the present value, or in other words, how much will this money be able to purchase in today’s cost of goods and services? About $1,000,000 to $350,000. This is what we call the present value. $1,000,000 to $354,000.

Analyzing the Effects of Social Security Election Age

When we look at taking Social Security at age 62, we’re going to come back and also compare these balances and look at the overall impact that could have on your retirement.
This is an analysis of taking Social Security at 62, full retirement age. We’re also going to look at 70 just to do that. We have strategy that we looked at right now, 67, full retirement age, $36,000. As I said in the beginning of the video, the spouse would receive 50% of that benefit, so 36 and 18, 98% probability of success spending that $50,000 and deferring until FRA. If we take it as soon as possible at age 62, income drops $25,200 to an $11,700. Pretty significant drop in annual guaranteed lifetime income.
That value of that total amount of money that you would receive over the course of your life now is also reduced. We’re looking at about a million dollars in total income from Social Security based on the life expectancy numbers. If we look over here at age 70, just to include that, it actually drops even worse, so 82%. This is a good scenario or a good example of not always deferring Social Security longer till age 70 makes sense.

This is our what if analysis. What if we want to look at investing in a different type of portfolio with different expected returns and different risk? What if we want to take Social Security at a different age? What if one spouse passes away unexpectedly and one spouse is left to take care of themselves? All of these what if scenarios we can throw into this calculator in order to do some type of mathematical analysis to see what the impact on your security, on the security of your family, on your retirement, what that is.
Everything is the same right now. The first thing I’m going to look at in is adjusting the Social Security. We’re going to adjust the Social Security here to as soon as possible. We’re going to calculate these scenarios. Just as we just saw, 89%, okay? Now we’re going to look at the bad timing. Okay, minus 20% the first year, minus 7.5, year two. Even though our overall probability of success has decreased from 98% to 89%, now look how much more secure we are from a account balance standpoint, probably sleeping a little bit better at night as well, when we look at the same thing we just looked at, but instead of continuing to defer Social Security, now we have $323,000 left versus without the sequence of returns, 578,000.
One dynamic move that we should be willing to consider if we go through a bad timing event is changing that Social Security strategy. A very good example here of how that could potentially leave you with more money in the earlier years of retirement and less likely to make a bad decision, like selling everything, going to cash, not participating when the market does rebound. All of these different pieces in retirement work together and we have to be making decisions with an understanding of how one choice impacts another part of your retirement. Everything has consequences.
Now I want to look at how making that early election for Social Security, how that impacts your account balances, looking at these individual trials, the different percentiles, and what we see is future balances, we see the range here, so about 2.1 to 477. Again, that’s future dollars. We discount it to the present value. How much in today’s dollars will this amount of money in the future be able to buy of goods and services? We see the range has decreased from 950 to 211,000. Smaller range of future potential balances, but is that a trade-off that you’re willing to have in order to sleep maybe a little bit better, in order to be more comfortable with what’s happening in your individual portfolio in the case of retiring during a bad timing event? These are the conversations that we like to have with you when we go through something like this, where 2022, we saw the market crater significantly.
If you had too much risk right before maybe you came to see us in your 401(k), and you had a million, and then you were down to 600,000, but you were dead set on retiring, well, one of the things we’re going to look at is doing this analysis of, should we take Social Security early? Maybe we should continue to work. Maybe all the different potential things that we could look at in order to identify not just can you retire and how much money can you spend, how does it impact the future balances of what I have in my retirement account?
Now we’ve established with this plan that we would set off on a course to where we would target taking Social Security at our full retirement age, but being mentally able and also physically willing to pivot to taking Social Security sooner if the market or our portfolio doesn’t perform the way we hope it would in the early years of retirement. What I’ve done is I’ve went back and now set this to taking Social Security at the current time. It hasn’t adjusted here quite yet, but it will when I hit the calculate button.

Stress Testing Retirement Spending Levels

Now I want to stress test different levels of spending. What happens, because it’s 98% projected success at $50,000 of spending, what happens if my average spending level is $55,000? Then what over here, can I stretch it all the way up to $60,000? Right here, this lower number underneath it, that’s when the husband here passes away the reduction in spending required to support one spouse as opposed to two.
Now we’re going to calculate these scenarios. The Social Security will adjust back to age 67. We see the probability of success here reduced from 98% to 86%, and then over here, 55%. This is probably really bad, so we probably don’t want to spend $60,000 a year. Here’s where having a dynamic plan and being connected and having visibility into these different decisions. What we could do, if you really want to spend $60,000 for the first four years or six years or seven years of retirement, we could create what we call a go-go retirement income plan, where we are stress testing this to say, okay, instead of spending $60,000 indefinitely until life expectancy, what if we spent $60,000 for the first six years of retirement? Then we reduce that back to $50,000. Then, Troy, you know what? I don’t think I’m going to really need much more than $40,000 or $45,000 from age 80 to 90. Then we could customize that income plan.
We’re stress testing different levels. Again, it’s just we’re charting a path that we’re going to start down by staying connected to that path and the impact that all the decisions that we’re making year to year in retirement are having on our overall probability of success. As long as you’re willing to be flexible and adjust when things happen. For example, the market does really well. Your portfolio does really. Well, maybe we can continue on spending that level of income for a longer period of time. If we get into a bad timing event, we need to pull that back. We’re connected. We have a dynamic plan.
86, maybe this is fine. We just want to monitor now this year to year to year and say, okay, we were at 86. Now we’re three years into retirement. Now we’re at 92. We’re actually doing pretty good here. Or if we have a bad timing event, guess what? We need to make some adjustments. I don’t want to get too deep into the overall allocation, which is step one of the retirement success plan. When we look at these different numbers and combining the income plan with the investment strategy, the more we want to take out of our accounts, the lower our capacity for risk is. Which just means we shouldn’t have a ton of exposure to equities. We shouldn’t be 80% equity, for example, possibly not even 60% in the bucket that we’re withdrawing the most amount of money from.
We very well could be, and that’s fine as long as we’re staying connected to it. Just understand that when we take large distributions, we need to reduce the risk to reduce the range of possible outcomes that portfolio could experience. Everyone’s a little bit different. You take all these different pieces of information that I’m talking about and start to think about what’s best for you in your particular situation. How willing are you to be flexible if things change other than what we expect to happen maybe over the next 12 or 24 months within the markets.

Tax Planning Considerations in Retirement

To close this out, we’re going to talk about step three of the retirement success plan, tax planning, and also step four, just briefly, health planning. When we talk about tax planning, there’s a general rule of thumb, the more we have in our retirement accounts. Someone with $2 million in their retirement accounts has a bigger tax problem than someone with $500,000. There’s a more urgency required to address that because once the Trump tax cuts expire at the end of 2026, not only are the rates coming down, but what’s going to happen is the brackets are going to compress, meaning you can take less money out of your accounts and pay an equal or similar amount of tax potentially.
For this particular scenario, there’s not a lot of value doing Roth conversions. It does provide value, but the question we have to look at is, if you’re 57, where are we going to get our income from? What is that going to do to possibly our health insurance premiums? Because if we take it from the IRA, one, we’ll have a 10% penalty, but two, that will be taxable income. Does that decrease the amount of subsidy that we may receive if we get our health insurance from the exchange?
All these pieces, again, they’re interlinked, but I just want to show high analysis here, high-level analysis. This is the base strategy where we’re actually looking at not doing any Roth conversions whatsoever, following a conventional wisdom sequence where we defer the IRAs as long as possible, withdraw from the non-IRAs. In this particular scenario versus the most optimized tax plan based on these scenarios for this snapshot in time, we’re looking at total taxes paid of $100,000 versus $47,000. It is doubled, but it’s only about $50,000 in taxes over a 30-year period.
Ending values, we do project to have more ending value at the end of the plan, but again, not a significant amount necessarily. What we probably would need to be more focused on is, how are we going to be covered for health insurance? If you are in this particular situation and we take money from the IRA, that’s taxable income. That is going to go on your tax return. That is going to impact the amount of subsidy you can receive for health insurance.
If we do Roth conversions, that is going to go on your tax return, which will impact the amount of subsidy that you receive. The challenge here is there’s only $50,000 in this case study of non-IRA money. We could pull that $50,000 in year one, get us to 58, and then in year two, if we are retiring, we’re going to have to pull from that retirement account, pay the 10% penalty, but then also possibly pay a higher level of health insurance cost. This example that we went through, it just simply assumes when we have $50,000 of spending, it assumes all that is wrapped into there.
On an individual basis, we could go through and itemize all this with you, but for the purpose of this video, unless you wanted it to be four hours, we have to throw all those expenses into one category, but I do want to get you thinking because health insurance is very expensive, unfortunately, in this country, and depending on what your income is, that determines how much of a subsidy you qualify to help subsidize that cost until you hit age 65 when Medicare kicks in.

Healthcare Planning and Final Retirement Insights

Step three of the retirement success plan is tax planning. Step four is health care planning, where we look at all of this, but as a high-level analysis, not a ton of benefit for Roth conversions here, and I would probably be more focused on trying to keep the health insurance costs down. Now, a lot of considerations there. Do you have specialists that maybe are in plan, or are they out of network with the particular health plan that’s offered on the exchange?
Hopefully, this video was enlightening, and it really opened your eyes as to how some of these different pieces of the retirement planning puzzle fit together, and my goal is to help you make better decisions with your retirement by helping you stay more connected to your money.

➡️ Do you need a Retirement Success Plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at (877) 404-0177 or fill out this form for a free consultation: https://click2retire.com/57-with-700k