Retired at 38: Fantasy vs. reality

You may think you have enough money saved for retirement, but the younger you call it quits, the bigger stash you'll need. Here are a few things to consider first.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)

NEW YORK (Money) -- Question: I'm single, 38 years old and have about $900,000 saved up. I'm tired of the stress of the corporate world and am wondering: If I live a very simple life, can I afford to retire and not have to worry about going through all my money? --Don H., Marietta, Georgia

Answer: I'm sure that almost all of us, at some point in our lives, have considered such a fantasy. I know I have. There are days when you just feel overloaded for any number of reasons -- pressure on the job, demands from the home front, perhaps a growing sense that you're on a treadmill moving ever faster making it harder and harder to keep up.

So I can relate to your impulse to drop out and live a simpler, slower-paced life, sort of the modern-day equivalent of Henry David Thoreau's move to Walden Pond.

But if you think it through, I believe you'll find what you're contemplating is really more a fantasy than a realistic plan, at least from a financial point of view.

I know that $900,000 sounds like a lot of money. And it is. At age 38, however, you need to plan on living at least another 40 to 50 years, so your savings are going to have to carry you a long, long way.

Making your money last

As a practical matter that means you must be very careful with withdrawals if you want to be sure you don't run through your stash. Advisers typically recommend that 65-year-old retirees limit themselves to an initial draw of 4% of their portfolio, and then adjust that dollar amount for inflation each year. By doing that, they have roughly an 80% to 90% chance that their savings will last at least 30 years.

So if you apply that standard, you would begin with an initial withdrawal of about $36,000, which you would then increase annually by the inflation rate to maintain your purchasing power.

But you need to be sure your money will last a lot longer than 30 years. So to be on the safe side you may want to withdraw even less initially, which would bring your income down.

Even then there's no assurance you won't go through your money. A lot will depend on how you invest your 900 grand. You could play it safe by keeping most of it in cash and bonds. But that would make it more difficult for you to maintain your draws should inflation rise in the future.

Devoting some of your savings to equities would give you a better shot at long-term growth that could keep your income growing as fast, or even faster than, inflation. If you hold withdrawals down and the markets perform well, your portfolio could even balloon in value. But the more stocks you own, the more you would be vulnerable to downturns in the market.

Downgrading your lifestyle

Even if you were confident that the 4% approach would allow your money to last the rest of your life, there are other reasons you might want to reconsider whether going ahead with your plan makes sense. One is whether you can actually live off an inflation-adjusted $36,000 or less a year.

As recent census figures show, many people obviously do. In fact, many get by on smaller amounts. But you won't have much margin for setbacks or room for frills. And if you've been making enough money to allow you to set aside $900,000 by your mid 30s, it's likely that you've been earning a lot more than $36,000 a year, in which case you may have quite a lifestyle adjustment to make.

Even if you're okay with that, you've also got to consider that, in real life, things happen that may prevent you from living within your budget. Cars break down. Unexpected medical bills pop up. You want to splurge once in a while.

So I think it's reasonable to assume there will be years when you've got to pull more than you anticipate from your savings. In some years it could be a lot more. And those extra draws could significantly raise your odds of running out of money sooner than you expect.

I'm not saying that it's impossible for you pull this off. But do you really want to? Retiring at your age strikes me as, well, a tad extreme.

Emotional satisfaction

Even beyond the financial issues I've raised, I have to wonder whether dropping out of the workforce at your age would lead to a very satisfying life. For most people, work is more than just a way to generate income to pay for life's necessities. It's also a way to stay socially connected, to interact with people. That's why so many retirees like to keep a hand in the job market even aside from financial reasons. A job can also create a sense of accomplishment, a feeling of fulfillment. Work, dare I say it, can even be fun.

If you're stressed out, there may be other ways to deal with the strain. Perhaps an extended vacation that allows you to recharge would help. Or maybe you should consider switching to a new career, or moving to another part of the country.

Or instead of dropping out completely, you could work fewer hours or even move in and out of the workforce (although moving back in when the unemployment rate is as high as it is today could be difficult).

My advice would be to try a scaled-down version of the simple life and see how it goes. This would give you a taste for a slower pace of life and more free time without requiring you to live solely off your savings.

Ultimately, this is a personal decision. If you're willing to deal with the financial challenge of living off your savings for the next four decades or longer, maybe you'll be able to fashion a very fulfilling life for yourself.

But the mere fact that you've asked the question indicates that you have at least some concerns about financial security.

I may be wrong, but my guess is that retiring at 38 and living off your 900 large will require a much bigger lifestyle adjustment -- and be less satisfying -- than you think. After all, even Thoreau's experiment with bare-bones living lasted only a little over two years. To top of page

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