If you’re like many adults, the thought of taking early retirement has probably crossed your mind at least once or twice. For most of us, it’s simply not an option, as the financial ramifications aren’t favorable and expected costs are still too great (e.g., dependent children who want 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 at age 45 with $500,000.
Apply the 4% Rule to Your $500,000
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 take that amount each year thereafter, adjusted for inflation.
Using the 4% rule on $500,000 would give you $20,000 a year (.04 x $500,000).
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.
Consider as well that $20,000 may be hard to live off of for an entire year, depending on the lifestyle you plan to have and the accompanying expenses.
Try doing the math with different yearly amounts to get an idea of what may be a more sensible amount of savings.
For example, if you plan to live off of $30,000 per year, you’ll need $750K socked away ($30,000 ÷ .04). If your expenses will be $40,000 per year, you’ll need $1 million ($40,000 ÷ .04).
Reality Check
Whether or not you could live (and be happy) on $20,000 per year depends on your lifestyle preferences plus your existing and future expenses. 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 withdrawing 4% may be unwise.
“The 4% rule does not work very well in … 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.
For now, though, let’s work with that budget and see what could help you manage that amount. For example, 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. One option: retire abroad to a destination that offers a change of scenery, new experiences, access to affordable health care, and—the big one—a lower cost of living.
According to the Annual Global Retirement Index for 2024, it’s possible for a couple to live comfortably in Ecuador, including rent, for $2,000 to $2,500 per month. Mexico, Panama, and Costa Rica, also 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 might then rent, buy a smaller home (maybe a tiny house), live abroad, or buy an RV and travel the U.S. (some people get free rent at a campground in exchange for being a “host”).
Social Security Benefits Can Help
At some point, you’ll start taking your Social Security benefits. 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.
If you can stretch (and even maintain or grow) your savings of $500,000 until you begin getting Social Security benefits, they’ll provide a welcome monthly cash infusion.
By the way, be sure that you have worked enough quarters to qualify for Social Security benefits.
Other Early Retirement Considerations
Even if you’re fortunate to have the choice, deciding when to retire can be challenging. Retire too soon and you 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 your current savings.
Smaller Monthly Social Security Payments
“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,” says Matthew J. Ure, vice president, of Anthony Capital, LLC-Southwest Region, San Antonio, Texas.
Health Insurance Coverage
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,” says Ross Haycock, CFP®, AIF®, vice president, Summit Wealth Group, Colorado Springs, Colorado.
Meaningful Activity
People who clock out early can face the same challenges met by people who work for the long haul: 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.
Working as long as you can is often the best choice. “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,” says John R. Frye, CFA, and Senior Advisor at Carnegie Investment Counsel in Los Angeles, California.
What’s a Safe Amount of Savings When I Retire?
Investment management company T. Rowe Price recommends that by age 45, you should have two-and-a-half to four times your earnings in savings. So, if you’re earning $75,000 per year at that age, then you should have $187,500 to $300,000 in your retirement account(s).
How Can I Increase My Savings While I’m Still Working?
You may be able to build your savings in a few ways. For example, you can try to save more than you currently do. You can also try to spend less. And you can invest more aggressively if you’re younger and have years to go before needing your money. If you’re closer to retirement, consider moderating your aggressive approach to protect your money from market downturns. This might mean reducing the percentage of your portfolio in equities and increasing the amount you have in fixed income securities.
How Do I Decide Whether I Should Retire at Age 45?
Such a decision differs for everyone. But in general, you could evaluate how much you’ll need to spend to live as you choose. You should also examine your existing savings and any other sources of income that you’ll have (and whether that income could change with time). Consider the pros and cons of living as a retiree, as well. Having all that information should help you make a decision.
The Bottom Line
Savings of $500,000 may sound like a lot of money. And it is. But if you retire at age 45 to live off of it alone, it may not last very long unless you live very frugally. Even then, it may get consumed while you’re still living.
In addition, by retiring so early, the monthly Social Security benefit you receive at full retirement age will not be as large as it would be had you continued working until that time.
Be sure to consider carefully all the financial and social consequences of leaving the workforce, and your steady paycheck, behind before you make such a decision.
