Key Points
To retire early, you generally need a lot of savings. It’s as simple as that.
It’s a pretty dangerous thing to retire at 55 with $400,000 in your IRA or 401(k). But with $2.4 million in savings, your financial picture changes. At that point, depending on your needs, you may have enough money to sustain yourself for an extra decade beyond a typical retirement age.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
But one thing you should know is that a stock market downturn at the start of an early retirement could be a recipe for disaster. So it’s important to be willing to change your plans if that happens.
The problem with a stock market crash early on
A stock market crash is never a good thing in the context of retirement. But early on, it can be especially problematic.
Let’s say you retire at 55 with $2.4 million, but the market loses 20% of its value your first year of not working. Suddenly, your portfolio value shrinks to about $1.9 million — not because you’ve withdrawn half a million dollars, but because the assets you own are worth less temporarily.
If you take large withdrawals to cover your living costs, you could make those temporary losses permanent. And that could leave you with less money for the rest of your retirement.
That’s why if you’re going to retire early, it’s important to be flexible during market crashes. That could mean reducing your spending and/or finding part-time work to ride out the storm.
Let’s say your original plan was to withdraw $85,000 a year from your nest egg to cover your living expenses. At a 3.5% withdrawal rate, that’s fairly sustainable, even for a longer retirement.
But that doesn’t mean you should stick to that plan if your portfolio loses 20% of its value. In that case, reducing your withdrawal to, say, $42,000 and making up the rest with part-time work could be your ticket to preserving your savings over time.
It’s important to be flexible
To pull off a successful early retirement, flexibility is key. That means adapting to market downturns and, if necessary, being willing to delay retirement if the market craters right before you’re scheduled to bring your career to a close.
If you forge forward with your plans regardless of market conditions, you could end up locking in permanent losses that put you at risk of running out of savings. And one thing you don’t want to do is have your early retirement be the reason the second half of your retirement is miserable.
The $23,760 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
View the “Social Security secrets” »
