Jan 21, 2025
You’re 52, sitting on a $2 million nest egg, debt-free, and ready to escape the grind. But now for the $2 million-dollar question: How much can you actually spend every year without running out of money?
Retiring this early isn’t just about the number you’ve amassed — it’s about what you do with it now to ensure you don’t outlive your savings.
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But first, congratulations. The percentage of people retiring in their 50s is becoming increasingly rare. And your savings have paid off, literally: For the age group 55-64, the median retirement account balance in 2023 was $87,571, according to Vanguard. By most measures, you’re way ahead of the game.
How much should you spend each year?
You’ve probably heard of the 4% rule, a staple of retirement planning that goes like this: Withdraw 4% of your portfolio in year one and adjust for inflation annually. The rule says a balanced portfolio should last you 30 years this way.
You could withdraw $80,000 (4% of $2,000,000) in your first year of retirement. In subsequent years, adjust upward for inflation. For example, with 3% inflation, your second-year withdrawal would increase to $82,400.
But it’s important to understand that the 4% rule isn’t gospel. The longstanding recommendation has recently come under fire from personal finance experts. Suze Orman has called it "dangerous" and suggested a more conservative 3%.
Morningstar recently revised its recommended starting safe withdrawal rate down to 3.7% from 4% in 2024, citing reduced return expectations for stocks, bonds, and cash due to higher equity valuations and lower fixed-income yields. This assumes a retiree is seeking a 90% probability of not running out of funds over a 30-year period with a balanced portfolio with 50% equity weighting.
Since you're retiring early, you may want to consider a longer retirement horizon than 30 years. According to Morningstar's calculations, your portfolio will have a 90% success rate of lasting 35 years if your withdrawal rate goes down to 3.3% ($66,000). It added that if a retiree is willing to adjust their spending in line with portfolio performance, they could use higher starting withdrawals and generally higher lifetime withdrawals.
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Budget like your retirement depends on It — because it does
Crafting a rock-solid budget is non-negotiable. Consider this framework for a 3.5%, or $70,000 withdrawal plan.
Housing costs, including property taxes, maintenance, and utilities, could run about $20,000 annually.
Healthcare expenses, including premiums and out-of-pocket costs, might take another $15,000. Insurance for home, auto, and other policies could add $5,000. (Remember, these are rough guides that will vary greatly depending on where you live, your health and your lifestyle.)
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Travel and entertainment might consume $15,000 a year, while hobbies and miscellaneous spending could require $10,000. Setting aside $5,000 for unexpected expenses ensures you’re prepared for surprises.
In those early years, learning to live on a conservative withdrawal will set you up for success later. It might be tempting to seize on your new freedom by splurging on a new car or frequent travel. Be careful: Big-ticket items can erode your portfolio quickly, so consider keeping your spending tight, especially in the early years while the bulk of your money stays in the market and preps your nest egg for the long haul.
When you reach your Social Security age, those monthly checks will add to your cushion. The longer you wait, the better – you can start withdrawing at age 62, but delaying your benefit until age 70 will result in a higher monthly payout.
Finally, teaming up with a savvy financial adviser who can fine-tune your strategy can keep your golden years worry-free.
Sidestep tax landmines
If a chunk of your savings is locked in tax-advantaged accounts, watch out for early withdrawal penalties. Cracking open a 401(k) or IRA before 59½ can cost you 10% off the top, plus taxes. Prevent having to turn to these accounts by maintaining a healthy emergency fund.
IRS Rule 72(t) offers a way out, but it’s tricky: The rule allows penalty-free early withdrawals from retirement accounts like IRAs and 401(k)s before age 59½, provided you follow strict guidelines.
If you wait to leave your job until the year you turn 55, you may be able to take advantage of the rule of 55 to withdraw funds from employer-sponsored plans penalty-free.
In both cases, regular income taxes still apply. Planning is essential.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
