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If you’re like many adults, the thought of taking an 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 – the financial ramifications are complicated, not to mention those 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 at 45 if you've managed to save $500,000 to fund it.

“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 $750,000 socked away. If your expenses will be $40,000, you’ll need $1 million – and so forth. (For more, see What Does a Sample Plan Using the 4% Retirement Rule Look Like?)

If you have $500,000, the math comes out to $20,000  a 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 one hopes will not be enough if you retire at 45.

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 today’s 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. (Also see Why the 4% Rule No Longer Works for Retirees.)

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 healthcare and – the big one – a lower cost of living. It’s possible for a couple to live comfortably in Ecuador, for example, on about $1,500 per month, including rent. In Nicaragua you get by on less than $1,200 a month.

“If you take out $20,000 per year, it’s enough to thrive in places like Mexico, Ecuador, Costa Rica, Malaysia, Thailand, the Philippines, Spain and Portugal – all popular retirement destinations ranked within the top 15 in the 2017 Annual Global Retirement Index,” says Trey Archer, expat financial advisor, Infinity Solutions Ltd., Shanghai, China. “While $20,000 can be enough, keep in mind that inflation, unforeseen expenses, medical bills, flights home and emergencies could eat away at this figure faster than you think, so it’s always recommended to have a bit more set aside for a rainy day.” (For more, see 8 Countries Where $200K in Retirement Savings Will Last 30 Years.)

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”). (For more, see Financial Considerations of Buying a Tiny House.)

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. (For more, see Is Waiting for Social Security Right for You?)

The average monthly benefit (as of May 2017) is $1,368. If you can stretch your $500,000 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. (You almost certainly have, but click here to be sure.)

“If you invest at an average return of 7% per year (not too big an “if”), your money will double every 10 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 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 , chief investment officer, Crane Asset Management, LLC, Beverly Hills, Calif.

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, at age 45 – 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,” says Matthew J. Ure, vice president, 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,” says Ross Haycock, CFP®, AIF®, vice president, Summit Wealth Group, Colorado Springs, Colo.

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 45 with $500,000.

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