Should I Retire Early at 49 With $1.3 Million in Investments and $150K Passive Income?

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Everyone has a different journey in terms of reaching retirement and saving enough to fund their daily expenses and potential aspirations later in life.

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Some work their entire life and are unfortunately still living paycheck to paycheck, while others may hit it big early and be able to retire in their 20s and 30s. For many, saving enough to retire comfortably involves working for a good 30 to 40 years and making smart financial decisions.

Today, I will take a look at one Reddit question that asks: Should I retire early at 49 with $1.3 million in investments and $150,000 in passive income?

What professionals and public data tell us

Here is the initial question from Reddit:

Should I retire early? I'm 49, military + VA retired, two rental homes, $1.3M in investments, and $150K+ in passive income. What would you do?
byu/Maleficent_Wrap_3635 inFire

First, we should applaud this savvy investor. Having a $1.3 million investment portfolio at the age of 49, as well as enough passive income from rentals to make $150,000 in annual income, shows this person has invested well and made smart financial decisions thus far.

Now, whether to retire boils down to several factors, but first, we can look at professional investment advice and use publicly available data to see how this Reddit user is doing.

According to Fidelity, which manages trillions of dollars worth of retirement assets, by the time one reaches the age of 50, they should have saved six times their salary. This is based on several assumptions, including a person saving 15% of their income annually starting at the age of 25, investing more than half of their savings in stocks over their lifetime, retiring at the age of 67, and planning to maintain the same lifestyle in retirement as they had before retirement.

Image source: Getty Images.

Assuming we go by this advice, if this person's annual earnings are $150,000, then they should have saved $900,000 by age 50, which this person has easily eclipsed.

However, this Reddit user also said they teach. If we assume their annual income is closer to $225,000, this person, according to Fidelity, should have saved $1.35 million by this time, which is right around where they are. This is all mostly theoretical, of course.

We can also look at how much people have actually saved for retirement by age 50. According to data compiled by Motley Fool, the average 401(k) balance of people in the 45-54 age bracket is $168,646, although the median number is $60,763.

Should this person retire at 49?

Based on Fidelity's advice, this Reddit user is right where they need to be, although Fidelity does assume in its guidance that people will work to 67. But when we look at actual data, the Reddit user looks to be well ahead of the average person in terms of savings.

If I use a retirement calculator and assume this person starts with $1.3 million, invests for another 18 years (until 67), generates an 8% return annually, and invests a quarter of their $150,000 in annual passive income each year ($37,500), this person would be able to grow that $1.3 million to about $6.6 million. Fidelity recommends having 10 times your annual salary saved by age 67. Even if this person is making $250,000 per year, they would easily have enough savings to carry them through retirement. The Reddit user also mentioned being able to eventually get Social Security and income from their pension.

Of course, this means the Reddit user probably can't splurge too much or dip into their savings early because they would still be investing a quarter of their passive income each year and keeping their initial $1.3 million invested in the market.

It all comes down to what this person's plans in retirement are. They specifically wrote on Reddit that they want to "build that dream business, travel, and write more."

If this is the case, I would tell this person that it's probably OK to give up their teaching gig if it is no longer rewarding and they would rather spend their time writing or traveling. However, I would keep the rentals up and running because that's valuable passive income they can live off of and invest. When compounded, they should be able to generate strong savings over the next 18 years, leading to even more financial freedom later on in life.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.