If you imagine yourself spending your days gardening or playing golf while most people your age are still decades away from retirement, you’re not alone.
Online forums and a lot of websites run by millennials are dominated by discussions about retiring far earlier than usual. However, achieving the goal of knowing how to retire at 45 is not something that is for the timid.
After reaching their mid-40s, the average adult in good health may live for more than three decades, and many will live to be 85 or 90 years old. It goes without saying that if you want to retire early, you’ll probably need a healthy investment portfolio to prevent running out of money before you die.
Dreaming of early retirement? You’re not alone. Many people fantasize about leaving the workforce behind and enjoying their golden years sooner rather than later. But is it actually possible to retire at 45 with $500,000?
The answer, as with most things in finance, is “it depends.”
Factors to Consider
Several factors influence whether retiring at 45 with $500,000 is feasible:
- Lifestyle: Your desired lifestyle in retirement plays a significant role. A luxurious lifestyle with frequent travel and expensive hobbies will require more money than a minimalist lifestyle focused on simple pleasures.
- Health: Your health and life expectancy significantly impact how long your savings need to last. Unexpected health issues can lead to higher medical expenses and deplete your savings faster.
- Investment returns: The returns you earn on your investments will affect how long your money lasts. A higher return allows you to withdraw more each year without depleting your principal.
- Other income sources: Do you have other sources of income in retirement, such as Social Security, pensions, or rental properties? These can supplement your savings and make early retirement more feasible.
Applying the 4% Rule
The “4% rule” is a widely used guideline for retirement withdrawals. It suggests withdrawing 4% of your nest egg in the first year of retirement and adjusting that amount for inflation each subsequent year.
Using this rule, $500,000 would provide you with $20,000 per year for 30 years. However, remember that the 4% rule assumes a 7% average annual return on investments, which may not be realistic in today’s low-interest-rate environment.
Reality Check
Living comfortably on $20,000 per year is challenging, especially if you have significant expenses like a mortgage or student loans. Additionally, the 4% rule may not be sustainable over a longer retirement period.
Out-of-the-Box Options
If you’re determined to retire early with $500,000, consider these options:
- Downsize your home: Selling your current home and buying a smaller, more affordable one can free up a significant amount of capital.
- Move to a cheaper location: Consider relocating to a country with a lower cost of living, such as those in Southeast Asia or Latin America.
- Generate additional income: Explore ways to generate additional income in retirement, such as starting a small business, renting out a property, or freelance work.
Social Security Benefits
Social Security benefits can provide a valuable income stream in retirement. However, remember that your benefit amount will be reduced if you claim it before your full retirement age, which is 67 for those born in 1960 or later.
Other Considerations
- Health insurance: Health insurance costs can be a significant expense in retirement, especially before you reach Medicare eligibility at age 65.
- Meaningful activity: Early retirement can lead to boredom and a lack of purpose. Consider how you will fill your time and stay engaged in retirement.
Retiring at 45 with $500,000 is possible, but it requires careful planning and realistic expectations. Consider your lifestyle, health, investment returns, and other income sources to determine if it’s the right decision for you.
Frequently Asked Questions
1. How much do I need to retire at 45?
The amount you need to retire at 45 depends on your desired lifestyle, expenses, and life expectancy. However, most financial advisors recommend having at least 25 times your annual expenses saved by the time you retire.
2. Is it better to retire early or later?
There is no one-size-fits-all answer to this question. Retiring early allows you to enjoy more free time and pursue your passions. However, retiring later gives you more time to save and potentially increase your retirement income.
3. What are the risks of retiring early?
The primary risks of retiring early include outliving your savings, experiencing unexpected health issues, and facing boredom or a lack of purpose.
4. How can I increase my chances of retiring early?
To increase your chances of retiring early, start saving early and aggressively, invest wisely, and consider ways to reduce your expenses.
Estimating Your Savings Goal
Let’s say you calculate your projected spending and determine that, in your first year of retirement, you can live comfortably on $50,000 annually from your investments. (You can do the math with our Retirement Cost of Living Calculator.) ) If you follow the 4% withdrawal rule, you will need to spend 20%25 times your yearly expenses to prevent withdrawing more than you should over time, even though this does not account for market volatility, inflation, or any taxes or fees associated with the account.
Thus, even on that tight budget, you would need to set aside a sizeable $1. 25 million to stay afloat. Saving heavily is essential because you can’t normally take money out of a 401(k) until you’re 59½ without paying penalties.
No matter what your anticipated retirement income is, you should use the withdrawal rate that you feel comfortable with to determine how much money you’ll need.
Understanding What It Takes to Retire Early
When it comes to retirement, the general rule of thumb is to withdraw no more than 4% of your savings in the first year and then adjust your income for inflation after that. However, people who intend to live out their retirement years might want to err on the side of caution and set a little lower withdrawal rate.
You must ascertain your anticipated yearly retirement expenses in order to calculate the amount of savings you will require. For someone who is still relatively young, that may seem overwhelming, but you can calculate your expected living expenses, such as rent, groceries, utilities, entertainment, and other costs, with the aid of a retirement calculator.
Health care costs are one of the expense categories you should definitely take into consideration, as they will probably be among your highest even in your late 40s or early 50s. Short-term expenses include things like health insurance premiums and cash-outlays like coinsurance and deductibles. Since most people don’t qualify for Medicare until they are 65, you might also need to shop on an exchange for health insurance plans.
Long-term medical costs are another factor to consider. Later in life, you might need to move into an assisted living facility or hire a caregiver. Currently, a home health aide’s hourly rate averages around $27. 2 In the meantime, a private room in a nursing home costs an average of $9,034 per month, making care there even more expensive. 3 You should include long-term care insurance in your living expenses and adjust for inflation if you intend to eventually purchase it to help with those unforeseen costs.