We’re pushing for $5 million by 2030 – but can we really retire with $250k in yearly expenses on the horizon?

A retirement nest egg worth $5 million is massive and large enough to finance the “chubbiest” of early retirements. That said, even the largest nest egg in the world can be cracked up and wither away to nothing if cash flows going out heavily outweigh the cash flows coming in or the nest egg’s growth rate. That’s why it’s so vital to crunch the numbers beforehand, even when dealing with a sum that seems like it could last a lifetime.

In this piece, we’ll check in on a Reddit couple without kids — you could call them DINKs, short for dual income, no kids — that’s hoping to retire in five years. While the seven-figure nest egg is sizeable, so too are the expected expenditures, currently gauged to cost around $250,000 per year.

Sure, $5 million is a lot of money, but in this particular case, it’s being split across two people. And with a fairly lavish lifestyle (travel, car payments, dining out, and all the sort) and the prospect of lower returns for the stock market over the next decade or so, I’d argue that some changes will need to be made if the prospective early retiree is serious about making their fortune last as they aim to retire in their 40s.

Not only will the nest egg need to last longer (potentially 50 years), but it will also need to stay invested for the long haul. With that, one should aim to have a more conservative withdrawal rate.

Is the retirement by 2030 possible for this couple?

Only if they’re willing to make some big lifestyle changes. With $250,000 in annual expenditures expected, the couple is looking at a 5% withdrawal rate — that’s a tad more aggressive than the typical “4% withdrawal” rate that’s a benchmark for most. And while a 5% withdrawal rate can work for some, I’d argue that it’s probably not the best idea for someone who’s looking to retire in their 40s.

They’ll need to stay invested for longer and will likely be served up more than a fair share of market crashes and crises. As such, the couple will either need to lower their annual spending or stay at work for a while longer until their withdrawal rate is at or below 4%. In my view, I’d aim for a withdrawal rate closer to 3%, given the added risks that come with an earlier retirement.

If there’s flexibility with the lifestyle, shooting for $200,000 (that’d imply a 4% withdrawal rate) in annual expenses seems like the way to go if the couple’s set on retirement by 2030. Furthermore, I think the couple can afford to slash expenses such that they only spend $150,000 per year (that would entail a conservative 3% withdrawal rate).

It’s the 4% rule, not the 5% rule!

In my view, the $12,000 per year car payments don’t make a whole lot of sense. The couple has more than enough to buy a vehicle (preferably a low-cost, used one) and do away with such cash outflows. Additionally, the travel, grocery, and dining-out expenses stand out as a tad excessive and in need of a good trim. By gutting much of the discretionary expenses, a withdrawal rate below 4% can be easily achieved.

Additionally, the couple has way too much money tied into a single stock ($1.25 million). That magnitude of single-stock risk is never a good idea for someone winding down for retirement. Sure, selling the shares will entail a hefty capital gain. But for the sake of diversification, it ought to be done, perhaps with the help of a tax-planning pro. Finally, with $580,000 of the 401(k) invested in mutual funds, their fees may not be minimized. Instead of mutual funds, which could boast fees ranging from 1-3%, I’d go for low-cost (0.1% expense ratio of lower) index funds.

The bottom line

This couple has a huge nest egg, but some lifestyle adjustments have to be made before pulling the trigger on retirement. Going for a 5% withdrawal rate, especially in one’s 40s, doesn’t seem like too good of an idea. After cutting some recurring costs and reallocating funds towards lower-cost (and more diversified) options, this couple can still make a retirement in five years happen.

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