Retiring at 52 with $2 Million: Retirement is an exciting prospect, especially when you’ve built a solid $2 million nest egg and have no debt. But the big question remains: How much can you withdraw annually without depleting your savings too soon?
Retiring early isn’t just about hitting a specific savings milestone; it’s about managing that money carefully to ensure it lasts. While many people dream of escaping the grind, it’s crucial to consider how your nest egg will support you throughout retirement.
A Big Milestone: You’re Ahead of the Curve
First, congratulations are in order. Not many people reach retirement in their early 50s, and even fewer do so with a $2 million portfolio. For context, the average retirement account balance for Americans aged 55-64 was just $87,571 in 2023, according to Vanguard. So, in terms of savings, you’re already way ahead of the pack.
How Much Can You Safely Spend Each Year?
You’ve probably encountered the “4% rule” when researching retirement strategies. This rule of thumb suggests that you can withdraw 4% of your portfolio in the first year and adjust for inflation annually. If you follow this rule, you could withdraw $80,000 in your first year, with future years seeing slight increases to keep up with inflation. For example, if inflation is 3%, your second-year withdrawal would be $82,400.
However, the 4% rule has come under scrutiny in recent years, with experts questioning whether it’s too aggressive given current market conditions. Financial guru Suze Orman, for example, has referred to it as “dangerous,” recommending a more conservative 3% withdrawal rate.
In 2024, Morningstar revised its recommended withdrawal rate to 3.7% for a balanced portfolio, citing lower expected returns from stocks and bonds. This revised figure aims for a 90% chance that your savings will last at least 30 years.
Since you’re planning for an early retirement, it’s important to factor in a longer retirement horizon. According to Morningstar’s analysis, if you lower your withdrawal rate to 3.3%, your portfolio will have a 90% chance of lasting 35 years, which is a good cushion if you retire at 52. If you’re comfortable adjusting your spending based on how the market performs, you could start with a higher withdrawal rate and potentially withdraw more over time.
The Importance of a Solid Retirement Budget
Regardless of the specific percentage you choose, developing a solid budget is essential to ensuring you don’t outlive your savings. Let’s take a look at an example based on a 3.5% withdrawal rate — which would give you $70,000 in the first year:
- Housing costs (mortgage, property taxes, utilities, and maintenance): $20,000 annually
- Healthcare expenses (including premiums and out-of-pocket costs): $15,000
- Insurance (home, auto, and other policies): $5,000
- Travel and entertainment: $15,000
- Hobbies and miscellaneous spending: $10,000
- Unexpected expenses: $5,000
In the early years, it’s crucial to resist the temptation to splurge. While it might be enticing to enjoy your newfound freedom with big-ticket purchases or frequent travel, large expenditures could quickly deplete your savings. Keeping your spending in check early on will give your investments time to grow and will allow your portfolio to better weather any potential market downturns.
Social Security: A Future Cushion
While you might not be planning to rely on Social Security just yet, keep in mind that waiting until you turn 70 to claim your benefits will result in a higher monthly payout. If you’re able to hold off on claiming Social Security until later in retirement, it will provide a financial cushion that can help you maintain your lifestyle as you age.
Tax Considerations: Avoiding Penalties
If your $2 million is primarily in tax-advantaged accounts like a 401(k) or IRA, be aware of potential early withdrawal penalties. Taking money from these accounts before age 59½ could result in a 10% penalty, in addition to regular income taxes.
There are ways to avoid these penalties. The IRS Rule 72(t), for example, allows penalty-free withdrawals from retirement accounts if you follow specific guidelines. Alternatively, the Rule of 55 allows penalty-free withdrawals from employer-sponsored plans if you leave your job in the year you turn 55.
Even if you take advantage of these options, remember that regular income taxes will still apply to your withdrawals, so planning carefully is essential.
In Conclusion: Set Yourself Up for Success
As you embark on your retirement journey, remember that careful planning today can lead to a more secure financial future. A financial advisor can help you refine your withdrawal strategy, optimize your tax situation, and make adjustments based on market conditions. Taking a conservative approach to your withdrawals early on will ensure that your $2 million lasts throughout your retirement and beyond.