How to Safely Retire at 55 with $2 Million (You Can)
When you entertain the idea of early retirement, first comes the feeling of excitement. Then, you start to question it: Do I have enough saved? How do I know for sure? And finally, fear creeps in. In this post, I’ll prove that living comfortably in retirement is possible. Just be appropriately conservative in your expectations, calculations, and assumptions to gain the confidence to safely retire early.
Be confident in your retirement plan, and you’ll feel great! Photo by Artem Beliaikin on Unsplash
“Can I retire at 55 years old with a $2 Million nest egg?”
The question is specific. And, so I’ll respond equally so:
“Yes, you can. If you’re 55 with $2.0 Million…
Your investments will support $70,000 annually
You should keep $250,000 in high-interest savings and the rest in low-cost, balanced index funds
Aim to live on $60,000 per year
And find or earn an extra $20,000 in retirement.”
To learn how I arrive at this answer, read on. It’s important because I need to prove my thinking. That will give you confidence. And confidence will keep you feeling great (and looking even younger than your 55 years).
An important note: I’m not a financial or investment adviser. This post only captures my perspective and what I would advise my own mother to do…which I have.
If your retirement savings isn’t quite $2 Million (or maybe it’s more), read to the end of the post. I’ve summarized solutions for retirement portfolios between $1 Million and $3 Million.
How can I be so confident?
Safety means a confident retirement
Your stated goal is to retire at 55 with a $2 Million nest egg. But, if you’re like me, your actual goal is captured in this question (if I may be so bold).
“Can I retire at 55 and live a comfortable retirement lifestyle on my investment income without fear that I’ll run out of money?”
This question summarizes common financial goals.
Living comfortably in retirement with savings of $2 Million requires being safe (conservative) in my recommendations. The five how-to steps below call out the five explicit safety measures taken.
Step 1 — Expect to live to 90
The average life expectancy for a 55-year-old woman is 27 1/2 years. (A man would live another 24 1/2 years.) So, I estimate a 35-year lifespan in retirement. You are better than average, right? :-) Actually, the data shows that you likely are. You’ve accumulated wealth and are better positioned to care for your health.
Fifty-five years plus 35 years is 90 years old.
Safety measure: Estimate living longer than the average life expectancy.
Step 2 — Your savings cover $70,000
What level of yearly living expenses will your savings support? The statistic most often quoted by financial experts is 4%. Bill Bengen’s 1994 study on the topic found that retirees in the United States could live on an inflation-adjusted 4% of their portfolios and not run out of money. I’ll conservatively use 3.5%.
$2 million multiplied by 3.5% is $70,000.
Safety measure: Use a 3.5% withdrawal rate, 0.05% less than recommended 4%.
Step 3 — Keep $250,000 in savings
How you invest depends on your goal, and your goal is simple: live successfully off your retirement savings. (Your investment goal is no longer to grow your savings!) Retirees fear having to withdraw their savings during a down market. This is devastating to your portfolio. Don’t withdraw investments in a down stock market! I recommend putting money — equal to living expenses for three+ years — in a safe, high-yielding savings account to protect yourself.
$70,000 multiplied by 3 is $210,000; plus a buffer of ~20% or $40,0000 is $250,000.
The rest of your savings stays invested in low-cost, balanced stock and bond index funds. These investments are likely held across taxable and retirement accounts like a Roth IRA or a retirement plan at work.
$1.75 of your $2 Million portfolio stays invested.
Safety measure: Protect against early losses in retirement by using a savings account.
Step 4 — Reduce expenses to $60,000
Protect against surprises by living below your means. You’re already familiar with this concept since you’ve built up a $2 Million portfolio. I recommend living on 85% of your retirement income. Do this by managing expectations about what you want versus need.
Take a look at large expenses like housing and think of creative ways to bring them down.
Can you move to a cheaper region, maybe even overseas?
Explore opportunities for healthcare coverage until Medicare kicks in. Coverage through healthcare.gov is a great, affordable option. Subsidies keep healthcare costs down.
Lastly, remember to consider taxes. You will likely have taxable income, so income taxes are an expense to assess.
Your living expenses target is 85% of $70,000 or $60,000.
Safety measure: Plan to spend even less than what your investments support.
Step 5 — Find $20,000 more income
Bring in some extra money to give you peace of mind. Where could you find or earn money equal to 33% of your living expenses? Here are four easy ways to make additional retirement income:
Add in your pension or social security benefits that start at full retirement age
Maybe you have rental property or dividend income from a business
You can turn your hobby into a side project to make some money doing what you love
You could work a part-time job to stay in touch with friends and the community
Aim to find another 33% of $60,000 or $20,000 yearly.
Safety measure: Make some money in retirement to feel more in control.
Remember to live well
With so much retirement advice out there, it’s easy to get overwhelmed. Keep in mind there are just three levers to pull to impact your retirement lifestyle. It comes down to:
Living expenses
Saving and investments
Income earned when retired
That’s it! Adjust these levers to find the right comfort level in your retirement.
And my last bit of advice:
As you age and your net worth grows (as it likely will if you follow this advice), spending a little more is okay. Take that extra trip to see the grandkids. Finance a year of college tuition for your nephew. Help your daughter start a business. Or give some money to charity.
Don’t wait to share your money only as an inheritance. Your family and friends need the help now. And you need to see how it’s changing their lives for the better.
P.S. Congratulations on your early retirement!
My forthcoming book
I firmly believe this post will get you 80% of the way to a successful retirement. If you seek the additional 20%, sign up to be an early reader of my forthcoming book (2025).
In it, you will learn how to live comfortably in retirement at any age and with any amount of retirement savings. I include instructions for my easy-to-use retirement calculator.
Click here to learn more about my book project.
Or sign up directly right here!
My early retirement story
I semi-retired in 2023 and celebrated by not working for six months. I filled my time with a one-month trip to Portugal and two months at our lakeside cabin in northern Wisconsin. My newest passion is coaching part-time. Here are my numbers, if they are helpful:
I’m 48 with $2.0 Million:
My investments support $70,000 annually
I keep $250,000 in high-interest savings
I live on $180,000 per year*
I earn an extra $150,000 in retirement*
*My numbers are different from what I share in this post because my family’s living expenses remain high. We’ve chosen not to move and live more cheaply; we live in the Bay Area. So I work more in semi-retirement than you might need to.
Additional retirement scenarios
If you have savings that range from $1 Million to $3 Million, refer to these quick summaries.
You’re 55 with $1.0 Million:
Investments support $35,000 annually
Keep $125,000 in high-interest savings
Live on $30,000 per year
Earn an extra $10,000 in retirement
You’re 55 with $1.5 Million:
Investments support $52,500 annually
Keep $190,000 in high-interest savings
Live on $45,000 per year
Earn an extra $15,000 in retirement
You’re 55 with $2.0 Million:
Investments support $70,000 annually
Keep $250,000 in high-interest savings
Live on $60,000 per year
Earn an extra $20,000 in retirement
You’re 55 with $2.5 Million:
Investments support $87,500 annually
Keep $315,000 in high-interest savings
Live on $75,000 per year
Earn an extra $25,000 in retirement
You’re 55 with $3.0 Million:
Investments support $105,000 annually
Keep $380,000 in high-interest savings
Live on $90,000 per year
Earn an extra $30,000 in retirement
Disclaimer
Please remember that this post paints broad strokes, which is always the best starting point.
Because I’m not a financial advisor, and I have purposely not discussed minimum distributions, specific asset allocations, when exactly to take social security payments, impacts of inflation and interest rates on investment returns, Roth vs. traditional IRA comparisons, capital gains, risk tolerance, the best brokerage account to use, capital gains versus ordinary income streams, specific mutual funds to invest in, the best retirement funds, or anything tactical like that.
If you need help there, please seek out a certified financial planner (not me) to help you. Good luck!
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Brian Herriot lives his semi-retired life from his home in Alameda, California, and cabin in Hazelhurst, Wisconsin. He also prepares financial freedom plans for consultants, coaches, and microbusiness owners in one-week sprints. Check out his take on a new and different kind of retirement at choosyconsultant.com.