Retiring early is a dream for many people, but determining if you have enough money to do so can be tricky. At age 40, most people still have at least a couple decades left until normal retirement age. With average lifespans increasing, it’s not unreasonable to plan for a 30+ year retirement. So is $2 million enough savings to comfortably retire at 40?
How much annual income can you withdraw from $2 million?
The first step is to estimate how much annual income your retirement savings can safely generate. One common rule of thumb is the 4% rule – you can withdraw 4% of your savings each year for living expenses without depleting your nest egg over a 30 year retirement. Using the 4% rule, a $2 million portfolio could generate $80,000 per year in retirement income.
However, some experts argue that the 4% rule may be too aggressive in today’s low interest rate environment. A more conservative withdrawal rate of 3-3.5% may be more prudent. That would equate to $60,000-70,000 in annual income from a $2 million portfolio.
Factors that affect safe withdrawal rate
- Longevity – Planning for a longer retirement requires lower withdrawal rate
- Asset allocation – More conservative portfolios need lower withdrawal rate
- Market performance – Periods of lower returns require adjustments
- Inflation – Rising prices will erode purchasing power over time
It’s wise to consult with a financial advisor to determine an appropriate, customized withdrawal rate for your specific situation.
Will $60K-$80K per year be enough to live on?
Whether or not that income range will sufficiently fund your lifestyle in retirement depends largely on your current and future expected living expenses. Here are some considerations:
Housing
If you own a home, will it be paid off by 40 or will you still owe a mortgage payment? Property taxes, insurance, utilities and maintenance are ongoing housing costs as well.
Healthcare
With early retirement, you’ll need to fund your own health insurance until eligible for Medicare at 65. Budget for premiums, deductibles, co-pays, dental care and vision expenses.
Debt
Pay off all consumer debt like credit cards and auto loans before retiring to reduce expenses.
Lifestyle
Consider your desired lifestyle – do you plan to travel often, pursue expensive hobbies, splurge on luxury items? Be realistic about discretionary spending.
Inflation
Inflation will cause prices to rise over a 30+ year retirement. Factor in higher costs for groceries, gas, entertainment, etc down the road.
How to make $2 million last 30+ years
To help your retirement savings go the distance:
- Withdraw conservatively, especially in early years
- Invest for growth – stocks, diversified portfolio
- Include inflation-protected assets – TIPS, I-Bonds, COLA increases
- Have a fixed income buffer – pensions, annuities, cash reserves
- Consider relocating for cost of living
- Be prepared to cut discretionary spending if needed
- Delay Social Security until age 70 for greater benefit
- Consider generating income – consulting, part-time work
- Review asset allocation and spending rate regularly
The impact of a 30+ year time horizon
The key fact to consider with retiring at 40 is the extremely long time horizon. While $2 million seems like a large amount of savings, it needs to support you for 30 years or more in retirement. Some things to keep in mind:
- Risk of portfolio depletion increases over long periods
- Sequence of returns risk is magnified – early bad years have an outsized impact
- Health care costs tend to rise with age
- Need for long-term care insurance increases
- Unexpected major expenses can occur – home repairs, car replacement, medical bills
- Advisors recommend 25-30x your annual spending to retire early
Having $2 million for a 30+ year retirement is not out of the question, but it leaves little margin for error. You’ll need to be diligent about managing spending and have a well-constructed, conservatively invested portfolio.
What if you want to retire even earlier?
Retiring at 40 is already very ambitious for most people. But some super-savers manage to amass enough to retire even earlier, say in their 30s. Here’s some quick perspective on retiring extremely early:
- Need even higher savings, at least $2.5 million, optimally $3 million+
- Require lower annual spending – potentially $40-50k range
- Aggressive savings rate – 75% or more
- High-risk tolerance needed
- Require side hustle/part-time work to bridge the gap
- Geoarbitrage – relocate to a LCOL area
- Maximize Social Security – delay until age 70
Retiring in your 30s takes major sacrifices, discipline, luck in career/investments, and accepting more risk. It can be done but is attainable for only a small fraction of the population.
The bottom line on retiring at 40 with $2 million
While $2 million seems like a lot of money, when spread over 30+ years of retirement, it provides only a moderate income stream in today’s dollars. Retiring at 40 requires seriously cutting back spending from your working years, implementing tax-efficient retirement income strategies, maintaining a prudent asset allocation, and being ready to adjust your plans if the market underperforms. It can be done, but requires commitment, diligent planning, and accepting greater uncertainty. Consult with a fee-only financial planner to assess your specific situation.