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Are We Nuts to Retire at 42 With $1.5 Million?

DP early retirement final


Dear Penny,
My wife and I are both 39 and have worked hard since graduating college. For the past 17 years, neither of us have been out of a job or for that matter ever really taken a vacation for more than a couple days. 

We’ve always planned to retire early, but in the past couple of years with COVID and our sons’ (11 and 8) activities, we’ve been counting down the days. We both have set a target date of three years from now when we are 42. This would allow us to enjoy some years with our boys, who will then be 14 and 11, before they go off to college. 

We currently own our house and cars completely debt-free. Between 401k(s), investments and  cash, we will have around $1.5 million combined, about $350,000 of which is in 401(k)s, or $2.3 million when adding in home and cars. We live in a suburban/rural area of Missouri, so the cost of living is below the national average. 

Further, my wife owns one third of the business I’m currently running, which is a family business. The business currently is successful, and her shares will be completely paid off at 42 under the current model. The company currently produces around $2 million a year of distributed income after tax that she will receive one third of once the sale is complete. 

After purchase, the dividends will go into a trust fund and should be around $750,000 a year. We plan to accumulate that money and live off the interest from her trust and our aforementioned assets. Our kids have fully funded 529 plans and starter accounts that will have restrictions on age for them. 

Are we nuts for wanting to just drop out of the workforce and live our lives with our kids? Are we missing something here? We both would like to travel and spend time with them until they go off to college, as we feel we will never be able to get those years back. Then, perhaps, we can reassess whether we’d like to work part time or do consulting when they leave our home. 

To further complicate things, I’m an only child. I want to make sure we have time to do some of these activities, as ultimately I feel I will have to help take care of my parents as they age. It’s a great predicament to have, but not one that is openly discussed. 

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We currently make around $350,000 a year in combined income but only spend around $125,000, putting away around $125,000 after taxes. 

-M.

Dear M.,

You and your wife are really good at working and saving money. But have you considered whether you’ll actually be good at not working? Boredom can take a toll on retirees of any age. After barely hitting pause over 17 years, I wonder how you’d adjust to suddenly having so much free time.

That said, I think you can easily retire from your full-time jobs in three years, but I wouldn’t leave the workforce altogether just yet. Most people can expect somewhat lower expenses in retirement. But since you have school-age kids and you want to travel, I’d expect your expenses to stay the same or even increase at first. So at a minimum, I’d plan to replace the full $125,000 you live on.


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In this case, work could take the form of consulting for five or 10 hours a week or pursuing something you enjoy that’s also profitable. In the best-case scenario, you won’t need this money. But you’ll also be grateful for the income in the event that things don’t go as planned.

You have a lot riding on one small family-owned business. What if its fortunes flipped, even temporarily? If that business income dried up, you’d have to take bigger withdrawals from your investments. One common recommendation is for retirees to limit their withdrawals to no more than 4% of their portfolios. But you need to make your money stretch about two decades longer than a typical retiree, so you’d want to be more conservative.

What if that happened as part of a wider downturn? Taking significant withdrawals from your investments after the market has tanked could be a severe blow to your wealth. A stock market crash is a big risk, particularly in the first years of an early retirement. And regardless of market performance, you wouldn’t want to touch any 401(k) money before age 59 ½ to avoid early distribution penalties.

Having a source of non-investment income will help you limit your withdrawals, giving your money more time to compound. Plus, if you decide you want to come out of retirement for any reason, it will be easier to scale up your work if you haven’t checked out completely.

Don’t worry that working a few hours a week will cause you to miss out on time with your boys. Sorry to say it, but most teens and pre-teens don’t want to spend every waking hour with their parents.

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You say that you and your wife are counting the days until retirement. Is that excitement talking, or is it burnout?

Make sure you’re not discounting the value of the present. The next three years matter, too. These are years you’ll never get back with your sons. So make spending time together a priority now. No matter how hectic work is, schedule at least a couple of weeks of family vacation time.

You’ve worked hard to make early retirement viable for yourselves. Perhaps if you can achieve some semblance of work-life balance now, the idea of working a little in retirement won’t sound so bad.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.


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