I Ran the Numbers on Retiring 5 Years Early With VOO. Here’s What Changed My Mind.

Retiring early is a dream for many. Understanding whether it’s a financially viable option is key.

I ran the numbers for two different scenarios, both considering a portfolio 100% invested in the Vanguard S&P 500 ETF (VOO -1.23%):

• Retiring at 60 and starting to withdraw from retirement savings immediately
• Retiring at 65, continuing to contribute for those extra five years, and letting it compound

It’s a very different outcome depending on which way you go. Spending plans, other sources of income, and other factors obviously play into which path you choose. But the gap between how much money you have in either scenario is significant, and it’s worth breaking down the numbers.

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Scenario 1: Retire at 60 and withdraw from retirement savings immediately

Assumption: I retire at 60 with $1.2 million invested and target a 4% annual withdrawal rate. Since I’m in retirement, I’ve switched to a more conservative investment mix with an expected annual return of 4%.

At $1.2 million, that produces $48,000 annually. For simplicity’s sake, let’s say the 4% annual return helps keep the overall balance at around $1.2 million.

Remember, you might need to make this money last another 30 years. Portfolio returns could keep the principal balance intact, but your $48,000 income wouldn’t change or adjust to inflation. You would either need to count on a higher return, which is a risk, or increase your withdrawal rate to keep up.

If you have other sources of income, such as Social Security, there’s a bit of a safety net. But there’s a risk that the money and your purchasing power start running out with that many years remaining.

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Scenario 2: Continue contributing to retirement savings and wait to retire at 65

Assumption: I start with $1.2 million at 60 and continue contributing $2,000 per month until I retire at 65. Since I’m near retirement, I’ve also switched to a conservative mix that earns 4% annually.

At that contribution rate and return assumption, the $1.2 million grows to roughly $1.6 million by age 65. You’ve worked an extra five years, but a 4% withdrawal rate now generates $64,000 in income, a significant bump.

Even if you remove the $2,000 monthly contribution and just let your investment compound for the extra five years, the ending balance is still around $1.46 million. The power of compounding is doing a lot of the work for you at this point.

The same considerations for inflation adjustments apply here. But you’re giving yourself a lot more financial flexibility by waiting a few extra years. A 25-year retirement is still long enough that the trade-off might be worth it.

Keep working or retire early?

It’s an entirely personal decision based on your circumstances, but I’m inclined to keep working in that situation. I prefer the financial flexibility, but there’s obviously a strong case to be made for leaving the workforce if your savings can support your spending plans.

At this life stage, the larger takeaway is that just a few years can make a big difference in your financial outlook.