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Early retirement in the bag?
I have $1.2 million in investments already and plan to double it. Can I afford to hang it up at 41?
October 14, 2005: 12:55 PM EDT
By Walter Updegrave, CNN/Money contributing columnist

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NEW YORK (CNN/Money) - My goal is to retire at 41. I'm now 33, my wife is 28 and we've got about $1.2 million in investments, two-thirds of which is in real estate. We've just had a baby and plan to have more in the future.

Assuming a 9 percent annual return, plus the additional money I plan to save, I figure I should have about $3.6 million in eight years. I figure I'll need about $10,000 to $15,000 a month to live on after retiring. What do you think -- can I afford to hang it up at 41?

-- Vince DeFreitas, Raleigh, North Carolina

Wow, you're looking to give new meaning to the phrase "early retirement." You're certainly off to a gangbuster start. Having more than $1 million in assets at your age is quite an accomplishment. And if you really can build your nest egg up to $3.6 million by age 41, I'd say you have a decent shot at, if not completely retiring, then certainly scaling back to a much more leisurely work schedule.

But there are a lot of "ifs" and assumptions built into all this. And the truth is, trying to predict whether someone at your age will be able to accumulate enough assets by age 41 to support himself, a wife and his family over a period that could easily stretch half a century is a dubious proposition at best.

Don't make too many assumptions

Let's start, for example, with that phrase "assuming a 9 percent annual return." That's certainly within the ballpark for long-term historical averages over the last 80 years or so. But a lot of investment pros think stock returns could fall well below the historical averages over the next decade or longer.

Why? Well, stock prices got bloated during the 1990 bull-market run. And even though we had one hell of a setback in 2000 through 2002, stock prices didn't fall as low on a price-earnings basis as much as they did in previous bear markets. All of which is to say stocks don't appear to be screaming bargains today, or even bargains at all.

Maybe 9 percent a year is achievable over the next 10 years or so, but I don't think they're baked in given today's valuations. So I don't think we can "assume" such returns.

But let's assume for argument's sake you do accumulate $3.5 million by the time you hit 41. Is it realistic to expect to be able to pull $10,000 to $15,000 a month from that sum over the next 40 to 50 years without running out of money first?

As a rule of thumb, if you want your investment portfolio to last 30 or more years, you should probably limit your initial withdrawal to about 4 percent of its value, and then increase that initial withdrawal for inflation each year. That would mean pulling out about $144,000 the first year, or about $12,000 a month.

That would put you smack inside the $10,000 to $15,000 range you want -- and, more importantly, allow for annual increases so you don't lose purchasing power. If the investment markets do really well, you could probably pull more money out. If the market delivers lousy returns or you run into an ugly bear market that decimates your portfolio early on, then you might have to trim withdrawals a bit.

So far, then, this all seems very doable if you come up with the bucks you think you can by 41.

But let's throw a few more things into the mix. You say you plan on having more kids. Let's say you end up with three kids. And let's say all three have the usual sorts of expenses kids have: the dancing lessons, summer camps, etc. And let's figure all three will want to attend decent colleges. And remember that if you retire as early as you want, you're going to have to foot health insurance premiums for you and your family for quite a while. So you might end up needing more income than you think.

Keeping an eye on inflation

One more thing. Even though moderating your withdrawals for inflation will keep your purchasing power constant in today's dollars, that may not be enough for the length of time you're talking about being retired. Why? Well, living standards are determined largely by wage growth. And over long periods average wage growth comes in about one percentage point higher than inflation. Which means that by merely increasing your withdrawals for inflation, your living standard would be slowly slipping behind that of your friends and neighbors.

It might not be noticeable at first. But over the course of 20 or 30 years, the effect would be as if your withdrawals could buy you the equivalent of a Levittown-style tract house while everyone else was buying sprawling suburban manses. So in order to keep your standard of living constant, you would have to increase your withdrawals by more than inflation. Which would mean having to accumulate a larger nest egg than $3.6 million -- or run the risk of your money running out later in life.

So what does all this mean as a practical matter for you? Well, I think it's too early for you to be able to set a retirement date with any sort of confidence. It's fine to have your early 40s as an ideal goal. But recognize that you're going to have to re-evaluate when you're within five years or so of that age.

Scale back rather than hang it up

I also recommend that you think not so much in terms of "hanging it up" at 41, but downshifting to a less hectic work schedule. Maybe you'll want to do some consulting work, or work part-time or start a business that brings in income but doesn't require maximum effort.

Working will bring you several benefits. First, you'll be more engaged in life; 41 is simply too young to drop out and sit on the sidelines. The income you earn will also take a lot of pressure off your portfolio. You won't have to withdraw as much, so you dramatically reduce the odds of your money running out. And by working you may be able to get health insurance benefits. That would represent a huge reduction in your expenses, again allowing you to trim withdrawals from your portfolio.

All that said, I think you should continue on your plan to put away as much money as you can. That's the single most important thing you can do to achieve your goal of early retirement, or whatever you want to call it.

On the investing front, I think you've got more of your money invested in real estate than I think is prudent, so I'd focus on building up those financial assets so that you eventually reverse the percentages so you have two-thirds of your assets in stocks, bonds and mutual funds and only a third in real estate. You'll have a lot more liquidity with financial assets, and that will come in handy when you need to start drawing on your savings. For help in how to structure your portfolio, you can check out our Asset Allocator.

Finally, you should take a look at the cover story in MONEY's September issue titled "Life Without a Paycheck: Declare Your Financial Independence." You'll find all sorts of good advice on topics ranging from investing to getting health insurance to making your savings last when you decide to leave the conventional work-a-day world early.

If you keep up the diligent saving, consider re-vamping your investment strategy along the lines I've suggested and re-assess your progress every few years, you've got an excellent chance of being able to work, not work or move back and forth between those two possibilities as you please by the time you hit your early 40s.


Walter Updegrave is a senior editor at MONEY Magazine and is the author of"We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."  Top of page



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