Jan 23, 2025
The good news is that a $2 million nest egg is not too shabby and can sustain you for the rest of your life as long as you don’t spend it irresponsibly.
According to Vanguard's 2024 How America Saves report, Americans ages 55 to 64 have a median balance of $87,571 in their defined contribution plans, like 401(k)s and 403(b)s. So by this account, you’re doing better than most if you have $2 million in retirement savings.
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But is it enough for you to spend $150,000 a year? Probably not. The life expectancy of Americans is about 77 years, and you’ll want to plan for longer than that.
There are a number of factors to consider while making the math work for early retirement.
How much you can spend in retirement
The 4% rule is one of the most popular ways to figure out how much you can spend each year in retirement. It says if you withdraw 4% of your balanced portfolio (50% stocks, 50% bonds) in the first year, with subsequent amounts adjusted for inflation, your retirement savings should last you 30 years. But of course, there are no guarantees and some experts have warned retirees about this rule.
So if you have a $2 million retirement portfolio, you can withdraw $80,000 the first year. This is a little more than half the $150,000 you’re looking to spend a year. You would need a nest egg worth almost $4 million to safely withdraw $150,000 a year, per this rule.
Your safe withdrawal rate would be even lower if you considered a longer retirement horizon, like 35 years or 40 years.
That’s not to say retiring earlier isn’t in the cards for you. It could be that you’ll need to adjust your spending drastically or find some way to earn enough to make up for the difference.
Earning an additional $70,000 so that you can spend $150,000 comfortably in retirement could mean working for a few more years. You could get creative — depending on your industry, you can freelance or become a consultant, giving you a more flexible schedule similar to what you’d get in retirement.
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Pulling off your early retirement plans
If you decide to retire at 52, you need to be sure you plan out what expenses you will have. A general rule of thumb says you should expect to spend 80% of your pre-retirement income each year if you want to maintain your current lifestyle.
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You need to also make sure your money is housed in the right types of accounts. When it comes to retirement accounts like IRAs and employer-sponsored ones like 401(k)s, you’ll face penalties if you make withdrawals before you reach 59 ½ years old.
According to the IRS, you’ll need to pay an additional 10% in taxes on top of what you’ll need to pay on the amount you withdraw. There are some exceptions — like if you’re facing financial hardship or purchasing your first home. But for the most part, you’ll need to pay the penalty.
What does this mean for you? If you plan on retiring at 52 years old, you need to tap into other types of accounts for the next several years. Assuming you have funds in a taxable brokerage account, you can rely on that as your source of retirement income.
Or, if you have other sources of passive income like real estate investments, consider using that until you can tap into your retirement accounts without penalties.
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Retiring early also means that you need to make sure your nest egg can last much longer than if you retired later. It’s important to track your spending now to see how much you need during retirement. See if there are ways to cut back or eliminate wishlist items like boats or a vacation property if need be.
There are also additional expenses to consider — you won’t qualify for Medicare until you reach 65.
Since you won’t have employer-sponsored healthcare, budgeting for this major expense is key. Will you go on COBRA, a temporary healthcare plan that’s the equivalent to your prior employer’s? Or will you find your own through the federal or state health care marketplace?
The average annual health insurance premiums in 2024 were $8,951 for single coverage and $25,572 for family coverage, according to a report from KFF.
Another common early retirement mistake is not planning for any upcoming major expenses that could have a large impact. For example, you may need to replace your roof in a few years or your 10-year-old car.
Since either of these can cost tens of thousands of dollars, making a plan now ensures you’ll be able to afford these big expenses on top of your daily necessities.
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Sarah Li-Cain, AFC is a finance and small business writer with over a decade of experience.
