I am 55 With $3 Million In Savings. Can I Retire Now?

Summary

In this case study, financial expert Rachel Camp explores the challenges of early retirement, using Elise and Nathan Park's story as an example. Despite having $3 million saved by age 55, they face concerns about healthcare, taxes, and accessing funds before 59.5. Rachel breaks down their spending into lean, maintain, and luxury categories and stresses the importance of understanding retirement gaps like healthcare costs and access to tax-deferred accounts. Using Monte Carlo simulations, Rachel shows that retiring at 55 with luxury spending is risky, while retiring at 57 with a maintain lifestyle offers a better chance of success.

Takeaways

• 😀 It's not just about having a specific number saved for retirement, like $3 million—it's about how that money is structured and accessible over time.
• 😀 Early retirement (before 65) is less about portfolio size and more about solving 'retirement plumbing' issues like healthcare, taxes, and account access.
• 😀 Spending should be categorized into three levels: lean, maintain, and luxury. This helps visualize whether your savings can support your lifestyle over time.
• 😀 Key retirement expenses often go overlooked, such as pre-Medicare health insurance, car replacements, and home maintenance. These should be factored into your plan.
• 😀 Having most of your wealth in tax-deferred accounts (401ks, IRAs) creates challenges for early retirees, especially when it comes to accessing funds before age 59½.
• 😀 Monte Carlo simulations are a useful tool to stress-test retirement plans, factoring in market volatility, inflation, and unexpected expenses.
• 😀 The typical retirement timeline can be broken into three phases: pre-59½ (early retirement), 59½ to 65 (flexible access), and 65+ (Medicare and Social Security).
• 😀 Health insurance costs and long-term care should be considered early, especially for those with family health histories like Alzheimer's, as these can impact retirement savings.
• 😀 Instead of asking 'Can I retire at 55?', ask 'What are the chances I can sustain my desired lifestyle at different ages and how likely is it I’ll need to adjust it later?'
• 😀 The best solution for many early retirees is to target a middle ground. For example, retiring at age 57 with a 'maintain' lifestyle, giving a good chance of long-term success (82%).

Q & A

Why is having $3 million saved not necessarily enough to retire at 55?

While $3 million might seem like a large sum, it doesn't account for factors like healthcare costs before Medicare, taxes, and the need for flexibility in accessing funds. At 55, it’s less about the total amount saved and more about having a well-structured plan for spending and access to funds.

What are the three spending levels that Elise and Nathan considered for their retirement?

The three spending levels are: lean spending (a more modest lifestyle), maintain spending (their current lifestyle), and luxury spending (a higher standard of living with more discretionary spending for travel, hobbies, and generosity).

What specific expenses did Elise and Nathan not initially account for in their retirement plan?

They did not initially account for pre-Medicare health insurance premiums, car replacements every 10 years, and home maintenance costs, such as new roofs or appliance replacements.

Why is access to funds before age 59½ a major concern for Elise and Nathan?

Most of their money is in tax-deferred accounts like 401ks and IRAs, which have penalties for withdrawals before age 59½. This limits their flexibility in using their savings without incurring extra costs.

What is the Rule of 55, and how does it help Elise in their retirement planning?

The Rule of 55 allows individuals to withdraw funds from their 401k penalty-free if they separate from service after age 55. Elise can use this rule to access her 401k early without penalty, provided her plan allows it.

How does healthcare before Medicare impact early retirees like Elise and Nathan?

Between the ages of 55 and 65, before they become eligible for Medicare, Elise and Nathan would need to pay for health insurance premiums, which can be a significant expense. In their case, this cost was estimated to be about $2,000 per month for both of them, which increases with inflation.

What is a Monte Carlo simulation, and how was it used in Elise and Nathan’s planning?

A Monte Carlo simulation runs a portfolio through thousands of different market scenarios to estimate the probability of success in meeting retirement goals. For Elise and Nathan, it helped to assess the likelihood of maintaining their spending levels throughout retirement, factoring in market fluctuations, inflation, and life expectancy.

What are the risks associated with retiring at 55 based on their stress test?

Retiring at 55 carries risks like a higher likelihood of needing to reduce spending later. For example, if they retire with a luxury spending plan, there’s only a 47% chance of maintaining that lifestyle indefinitely. Even a maintain plan gives only a 60% success rate at that age.

Why did Elise and Nathan ultimately decide to target retirement at age 57?

They targeted age 57 because it provided an 82% success rate for maintaining their spending levels. This struck a balance between retiring earlier and having a higher likelihood of financial security without the need for constant spending adjustments.

What role does building accessible savings in taxable accounts play in early retirement planning?

By saving more in taxable accounts, Elise and Nathan increase their flexibility in accessing funds without the penalties associated with tax-deferred accounts. This allows them to cover living expenses during early retirement without being overly reliant on 401ks or IRAs.