Saving $1 million is an exciting milestone, and it’s something some people never achieve. If you’ve hit this target and have a seven-figure nest egg by age 40, you may be wondering if you can retire.
Here’s what you need to know to help you make that choice.
How much income will $1 million actually produce?
If you are considering retiring with your $1 million nest egg, you would need to know how much annual income you could get from it. After all, you can’t just start spending all the money you have — you need the funds to last for the rest of your life.
In order to make sure your money does not run out, you’ll have to decide on a safe withdrawal rate. Experts now recommend limiting withdrawals to 3.7% of your account balance. With $1 million invested, that would mean you could produce $37K in annual income from your savings.
That probably is not enough for most people to live on — especially when you consider the fact that if you are retired, you are going to have to pay for your own health insurance, which could eat up a good chunk of that $37K by itself. If you have kids, or plan to, or if you want to enjoy your retirement and do some traveling or indulge in some expensive hobbies, you are likely going to fall far short of the money you need.
If you retire at 40, you will also have a pretty short career. Since Social Security benefits are based on average wages during your 35 highest earning years, no matter how much you actually earn or how long you work, you’d probably get stuck with a really low Social Security benefit.
With limited savings and small retirement checks, you could end up struggling a great deal — especially late in life. So, unless you plan to live in a very low-cost-of-living area — perhaps even somewhere outside of the United States — you are not ready to retire yet.
Work with a financial advisor to achieve your goal of early retirement
While retiring at 40 with $1 million isn’t a wise financial move for most people, the fact is that saving $1 million at such a young age is a major milestone. It is also a milestone that could set you up for early retirement, although you will need to keep working for at least a little bit longer to get there.
Your best bet in this situation is likely going to be working with a financial advisor. Your advisor can help you to set an appropriate retirement goal given the amount of money you want to spend, your income, and how much you can save and invest. Your advisor can also work with you to help you find ways to hit that target ASAP by reworking your budget and investing the right amount of money in the right kinds of accounts.
With some solid professional help and advice, and a pretty good start on retirement investing, you should be able to leave work at a far younger age than most people and have enough money to support yourself in comfort when you do. The sooner you get that help, the sooner you can begin working towards this future, so don’t wait to get the advice you need to build upon your great start and end up rich.
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