Is It Possible to Retire at 45 With $500,000?

Retiring at 45 with $500,000 is an ambitious goal. However, under the right conditions, it’s possible. Let’s take a deeper look in this article.

Key Takeaways

• Retiring at 45 with $500,000 is possible but requires a well-planned financial strategy.
• To make it work, you need to keep a close eye on living expenses, especially healthcare costs.
• Safe withdrawal rates, like 4%, help ensure your portfolio lasts throughout retirement.
• You may need to supplement your retirement savings with passive or part-time income.
• Inflation and the tax efficiency of your portfolio also matter.

Step 1: Understanding Your Retirement Expenses

Let’s start on the expense side. In order to retire at 45 with $500,000, you have to understand what your monthly and ongoing expenses will be. A good starting point is to categorize expenses into fixed (e.g., rent, mortgage, property taxes) and variable (e.g., travel, entertainment, dining out).

Another thing to keep in mind is how expenses evolve over time. Healthcare costs tend to rise with age, and unexpected costs like home repairs may be more likely the longer they are delayed.

In 2022, the latest survey data is available, the Bureau of Labor Statistics found the total average household expenses for retirees was $54,975. Healthcare expenses were about $625/month, housing costs were about $932/month, and transportation costs were about $672/month.

Step 2: Understand the 4% Rule

The 4% rule is a commonly used guideline in retirement planning, suggesting that withdrawing 4% of your portfolio annually should provide financial security for at least 30 years. The guideline helps retirees understand the long-term implications of their drawdowns.

If applied to a $500,000 retirement balance, this would equate to a roughly $20,000 annual withdrawal. Taking a glance back at Step 1, this would hardly cover half of the expenses of an average retiree. However, your personal expenses may be different. In addition, in the next step, we’ll look at ways to bridge any shortfalls.

Note

If you begin collecting Social Security at age 62, you’ll only be entitled to 70% of your benefit. If you wait until age 64, you’ll get 80%. If you wait until age 67, you’ll get 100%.

Step 3: Filling In Any Gaps/Shortfalls

If your expenses from Step 1 exceeded the 4% rule guidance in Step 2, not all hope is lost. First, your portfolio can stil grow in retirement. Let’s say you withdraw 4% of your $500,000 portfolio in your first year of retirement. If your portfolio then generates a 10% market return, you’d actually end the year with $528,000. In theory, you’d be able to draw more next year, though keep in mind these types of returns may not always be possible or guaranteed.

Another option is to consider other passive income opportunities. If you own your house, perhaps you can generate rental income. If you have specific talents, perhaps you can generate future royalties from intellectual properties. In this sense, you’d be retired but still collecting income to cover expenses from Step 1.

Yet another option is not a full-on retirement. Even earning a small amount can significantly improve your savings outcome. Assume a 3% inflation rate (which we’ll talk about later), a market that returns 7%, and a portfolio starting balance of $500,000. After 30 years:

• Withdrawing at a 6% rate would deplete the fund before 30 years. The “balance” at year 30 would be -$82,617.
• Withdrawing at a 4% rate would allow the fund to grow. The balance at year 30 would be $1,213,631.
• Withdrawing at a 2% rate would allow the fund to grow even more. The balance at year 30 would be $2,509,879.

A Note on Inflation

Inflation erodes purchasing power over time, meaning that a $500K retirement balance today won’t have the same value in 20 or 30 years. Discounted to its present value, $500,000 30 years from now is only worth roughly $206,000 in today’s dollars.

This is an underappreciated aspect of retirement planning. If you have a monthly expense that’s $100 today, that charge will be $134.39 ten years from now (assuming a 3% inflation rate). You need to be mindful of not only what your expenses will be but how they increase year-over-year. For instance, in 2024, due to a variety of reasons, the price of eggs rose 36.8% – much more than the 2.9% overall inflation from December 2023 to December 2024.

A Note on Tax Efficiency

Let’s also touch briefly on the tax efficiency, as not all $500k retirement balances are created equal. A Roth IRA is a tax-sheltered retirement vehicle that houses contributions that have already been taxed. Earnings grow tax-free, so very generally speaking, there’s usually no tax liability when withdrawing from that $500k.

However, earnings are taxable in a traditional IRA. Let’s say half of your $500k is growth (not direct contributions) and your tax rate is 10%. This means $25k of your portfolio will go straight to taxes. Should your portfolio appreciate at all, those future earnings will also be taxable. Though retired, you may still be generating taxable income (under Step 3), bumping you into a higher tax bracket.

One very important note here: there are many eligibility rules for tax-advantaged account withdrawals. You likely won’t be able to pull earnings until 59½ years old, meaning you might have a roughly 15 year gap between when you retire and when a bulk of your savings may be available.

A Note on Medical Expenses

Even if you’re a very healthy 45-year-old, there are medical considerations to keep in mind. According to American House Senior Living:

• An individual between age 65 and 74 will spend an average of $13,000/year on healthcare.
• An individual between age 75 and 84 will spend an average of $23,000/year on healthcare.
• An individual 85 years old or greater will spend an average of $40,000/year on healthcare.

Perhaps partially due to inflation and partially due to needing generally more healthcare services in general, people are spending more on healthcare. A 2024 study by Fidelity revealed a 65-year old will spend twice as much on healthcare compared to what would have been spent in 2002.

Can You Retire at 45 with $500,000?

Retiring at 45 with $500,000 is challenging but feasible, depending on lifestyle choices and how you manage your investments. If you live frugally, control healthcare costs, and invest wisely, you can make your savings last and increase your odds to a successful retirement at 45.

What Is the 4% Rule in Retirement Planning?

The 4% rule suggests that retirees can withdraw 4% of their portfolio’s value annually, which historically has been a sustainable withdrawal rate. This rule assumes that your investments will generate average returns and inflation remains manageable.

Is Healthcare Covered in Early Retirement?

Healthcare is often the most expensive and overlooked factor in early retirement. Before reaching Medicare eligibility, you’ll need to secure private health insurance which can be costly.

How Can You Supplement Retirement Income?

If your portfolio doesn’t provide enough income, you can supplement it by working part-time, freelancing, or using rental properties to generate cash flow. Before jumping into these processes, also take a look at your expected expenses as it might be easier to simply cut spending instead of trying to generate revenue.

The Bottom Line

Retiring at 45 with $500,000 is possible but requires careful planning. Start by knowing what your expenses will be and how they compare with the industry guidance of 4% annual drawdowns. You can also take steps to mitigate the impacts of inflation, increase the benefits of tax efficiency, and plan for escalating costs like healthcare costs.