If you’re like many adults, the thought of taking early retirement (could you retire at 45?) has probably crossed your mind at least once or twice. For most of us, it’s simply not an option as the financial ramifications are complicated (not to mention those dependent children who seem to need to go to college).
Still, we sometimes hear about friends, family members or complete strangers who decided to clock out early and gamble that they’ll be able to make ends meet for the next several (or more) decades. Here’s a quick look to see if it’s possible to retire on $500K if you are 45 years old.
“Retire at 45 with $500,000” and the 4% Rule
The “four percent rule”—a widely accepted financial rule of thumb—states that your savings should last through 30 years of retirement if you withdraw 4% of your nest egg during the first year of retirement and then adjust each year thereafter for inflation. To figure out how big a nest egg you’ll need, you have to match that 4% to your anticipated expenses. If you plan to live on $30,000 each year, for example, you’ll need$750K socked away. If your expenses will be $40,000,you’ll need$1 million—and so forth.
Key Takeaways
- It may be possible to retire at 45 years of age, but it will depend on a variety of factors.
- If you have $500,000 in savings, accordingto the 4% rule, you will have access to roughly $20,000 per year for 30 years.
- Retiring abroad in a country in South America may be more affordablein the long term than retiring in Europe.
- Retiring early at 45 years of age will keep you from prime earning years that could potentially increase your amount of social security.
If you have $500K, the math comes out to $20,000a year, assuming a 4% withdrawal strategy. But remember, the 4% rule doesn’t work for an indefinite amount of time. It’s intended to see you through 30 years of retirement, which if you are in good health will not be enough if you retire at 45. Retiring on $500K at age 55 may give you a better outcome financially.
Reality Check
Whether or not you could live (and be happy) on $20,000 depends on your lifestyle preferences and situation. If you stick to 4%, you’re looking at about $385 a week or about $1,667 a month—which isn’t a lot. And there are those who think that in the current environment, 4% may be too generous.
“The 4% rule does not work very well in current conditions with historically low-interest rates. A safe withdrawal rate may be closer to 3% or 3.5%. There are some adaptive distribution strategies that might extract a little more value out of a $500,000 portfolio. Four percent is still rather aggressive even with constant portfolio monitoring,” says Louis Kokernak CFA, CFP, founder of Haven Financial Advisors in Austin, Texas.
But for now, let's work with that budget and see what would help you manage on that amount. It will be easier if you:
- Already own your home free and clear (no mortgage)
- Don’t have college expenses coming up (you don’t have kids, they’ve already graduated, they’ll qualify for full scholarships, or you’ve already set money aside in a college savings plan)
- Are healthy now and are really proactive about staying that way (eating well, getting enough exercise, getting enough sleep, etc.)
- Are content to live frugally
- Are willing to think outside the box and try a different approach
Out-of-the-Box Options
There are ways to lower your monthly living expenses if you’re willing to go that route. One option: retire abroad in a destination that offers a change of scenery, new experiences, access to affordable health care, and—the big one—a lower cost of living. It’s possible for a couple to live comfortably in Ecuador, including rent, for example, at about $1,500 to $1,825 per month.
According to the Annual Global Retirement Index for 2022, Mexico, Panama, and Costa Rica, all offer affordable options for retirees.
Another option: If you already own a home, you could sell it and add the proceeds to your savings. You would then have the option to rent, buy a smaller home (maybe a tiny house?), live abroad, or even buy an RV and travel the U.S. (some people get free rent at a campground in exchange for being a “host”).
Social Security Kicks In
At some point, Social Security will kick in. For anyone born in 1960 or later, the normal retirement age—the age at which you are entitled to full Social Security benefits—is 67. You can start taking benefits as early as age 62, but your monthly benefit will be reduced by about 30%. The longer you wait to start, the more you’ll receive each month. You can delay your retirement benefits until age 70 for an even larger monthly benefit.
The average Social Security monthly retirement benefit (as of March 2022) is $1,618.29.
If you can stretch your $500K in savings until then, your Social Security benefits will kick in and provide a welcome monthly cash infusion. Be sure, by the way, that you have worked enough quarters to qualify for Social Security.
“If you invest at an average return of 7% per year (not too big an “if”), your money will double every ten years. Therefore, if you have $500,000 at age 45, you can have $2 million at age 65 if you leave it alone. Why not work longer so you can enjoy life more?If you are going to live for 40 years or so (after retirement at 45) you might get awfully bored if you are not gainfully employed. And if you are living off savings that must last 45 years, your lifestyle will never get more opulent,” saysJohn R. Frye, CFA, and Senior Advisor at Carnegie Investment Counsel in Los Angeles, California.
The Bottom Line
Deciding when to retire—if you’re fortunate enough to have the choice—can be challenging. Retire too soon and you might risk running out of money. Retire too late and you risk not being able to enjoy some of the adventures you were looking forward to experiencing.
If you want to retire early—or really early, in your 40s—it’s important to consider more than finances. “The tradeoffs for such a decision should not be taken lightly as [retiring at 45] you would give up prime earning years, which not only provide greater retirement savings but because Social Security looks at years of work and earnings levels, your Social Security income would be greatly reduced in retirement. Further, if you were required to return to work you'd be at a huge disadvantage,” saysMatthew J. Ure,vice president, of Anthony Capital, LLC-Southwest Region, San Antonio, Texas.
And don't forget the cost of health coverage. “Health insurance will be a significant expense until you reach Medicare age at 65, probably eating one-third to one-half of your yearly expenses, depending upon where you live,” saysRoss Hayco*ck, CFP®, AIF®, vice president, Summit Wealth Group, Colorado Springs, Colorado.
People who clock out early can face the same challenges met by people who work for the long haul: things such as loneliness, boredom, lack of purpose, and feeling out of touch. It’s best to look at the whole picture—financial and emotional factors alike—when deciding whether you can retire at age 45 with $500,000.
As a financial planning enthusiast with a background in investment strategies and retirement planning, I can provide valuable insights into the concepts discussed in the article. My expertise is grounded in a deep understanding of financial principles, investment vehicles, and retirement dynamics.
The article explores the idea of early retirement at the age of 45 with a $500,000 nest egg, primarily focusing on the widely known "four percent rule." Let's break down the key concepts discussed:
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The 4% Rule:
- The "four percent rule" is a financial guideline suggesting that you can withdraw 4% of your retirement savings in the first year and adjust for inflation in subsequent years. The goal is for your savings to last approximately 30 years. If you have $500,000, this implies an annual withdrawal of $20,000.
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Retiring Abroad:
- The article suggests that retiring in a country with a lower cost of living, such as in South America, can be more financially viable in the long term than retiring in Europe or other expensive regions.
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Reality Check:
- It emphasizes the importance of lifestyle preferences and situations in determining whether living on $20,000 per year is feasible. Factors include owning a home, having no mortgage, no upcoming college expenses, good health, and a willingness to live frugally.
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Out-of-the-Box Options:
- The article suggests unconventional approaches to lower living expenses, such as retiring abroad or selling a home to add proceeds to savings. These options aim to make early retirement more financially sustainable.
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Social Security:
- Social Security benefits become a significant factor, with the article highlighting the normal retirement age of 67 and the possibility of starting benefits as early as 62, albeit at a reduced rate. Waiting until age 70 results in a larger monthly benefit.
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Investment Growth:
- The article briefly touches on the potential for investment growth, stating that if you achieve an average return of 7% per year, your money can double every ten years. This is a key consideration for those contemplating early retirement.
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Considerations for Early Retirement:
- It warns about the trade-offs involved in early retirement, including giving up prime earning years, potential reductions in Social Security income, and the impact on lifestyle. Health insurance costs until Medicare age and emotional factors like loneliness and boredom are also mentioned.
In conclusion, the article provides a comprehensive overview of the financial considerations and challenges associated with early retirement at the age of 45 with a $500,000 savings. It encourages readers to weigh financial and emotional factors carefully before making such a decision.
