Achieving retirement before 50 may seem unreachable, but it’s entirely doable if you can save $1 million over your career. The keys to making this happen within a little more than two decades are a rigorous budget and a comprehensive retirement plan. To determine if $1 million is enough at 45 for your unique circumstances, you’ll need to estimate retirement income, expenses, and debt. Here’s how to invest and budget for an early retirement.
A financial advisor can help you create a financial plan for your retirement needs and goals.
Can I Retire at 45 With $1 Million Dollars?
Retiring at 45 with $1 million means leveraging your nest egg to generate enough income to cover your expenses. Therefore, your lifespan, expenses, lifestyle and income streams are crucial to measuring when planning to retire young. In addition, a retirement calculator can help you understand how your financial position relates to your retirement plan. Entering your location, savings rate, Social Security benefit, and more will help you determine your ability to retire at 45.
How to Determine How Much You Need to Retire
Retirement at any age requires accounting for various factors, such as taxes, expenses, and income. The following will help you evaluate your financial situation:
Calculate Your Costs in Retirement
Your cost of living is foundational to a realistic retirement plan. In other words, your habits and preferences drive your monthly expenses. For instance, eating dinner at restaurants five days a week creates a significant item in your budget. In addition, your location will affect your spending power. USA Today’s most recent report shows that in Florida, a popular retirement state, a dollar has 99 cents of purchasing power. Therefore, life is affordable for retirees with a modest income, as opposed to California, where your dollar only has 87 cents of purchasing power.
Likewise, taxes will influence your retirement costs. Living in a tax-friendly state like Florida or Georgia can reduce your income taxes, but you’ll need to account for how your income streams, such as annuities or savings accounts, impact your tax situation. Likewise, property and sales taxes vary by location, affecting your bottom line.
Healthcare expenses are another crucial consideration for retirees, as healthcare costs increase as people age. HealthView Services Financial reports that a couple retiring at 65 with no severe health issues will spend around $662,156 on healthcare throughout retirement. Therefore, it is advisable for a couple retiring at 45 to budget for a similar amount, plus an additional 20 years of medical expenses. A general guideline is to allocate 15% of your annual income to medical costs.
Lastly, you’ll face additional expenses if you retire at 45 and have children at home. The Washington Post reported the average annual cost of raising a child is about $17,000. Therefore, children must be accounted for in a retirement budget.
Identify Retirement Income Streams
Your income streams are the next piece of the puzzle. The key is to make $1 million provide enough annual income so you never have to touch the principal. For instance, if you have $1 million in a brokerage account that provides a 5.5% return, your annual income would be $55,000. However, stock portfolios can be risky, meaning your income likely wouldn’t be stable. Therefore, diversifying is crucial to balancing your assets between risk and reward.
When you think of retirement income, you probably think of Social Security. A thorough retirement plan accounts for this income. However, because the earliest you can collect Social Security is age 62, retiring at 45 means going 17 years at minimum without this income. Therefore, your plan must get you to the conventional retirement age with your finances intact.
Look at the Numbers
Let’s put the numbers together in an example. Say you’re single and want to retire at 45 with no children in the house. Your life expectancy is 85, meaning you’ll have a 40-year retirement. In addition, you’ll retire in Georgia, which has no state income taxes. Here are your annual expenses:
- $18,000 for housing
- $10,000 for healthcare
- $6,000 for utilities and property taxes
- $4,000 for food
- $6,000 for entertainment, phone, and internet
- $2,500 for auto upkeep and insurance
So, your annual expenses are $46,500 total.
For income, you decide to simplify your situation by purchasing an annuity shortly before retirement. The $1 million annuity provides a $5,000 monthly income, or $60,000 annually. This annuity incurs regular income taxes. Therefore, you’ll owe about $8,507 in federal income taxes, leaving you with $51,492 in your pocket (if you apply the 2023 tax rate, which is subject to change). This figure means you can afford you living expenses of $46,500 with almost $5,000 of surplus cash each year. Another advantage is the annuity guarantees payments for the rest of your life, meaning you can’t outlive your retirement savings.
However, inflation will increase your cost of living each year. It’s recommended to factor in a 3% interest rate into your retirement plan. So, your $46,500 of annual expenses will grow to $52,334 after five years due to inflation. Fortunately, your annuity income has been higher than your expenses up until this point, and you’ve socked away the extra cash. In addition, you decide to pick up part-time work to pad your budget until you take Social Security.
Social Security can start 62, but you can delay it until 70. The advantage of waiting is your income increases by about 8% per year you prolong your benefit. You decide to work part-time until 67, when you’ll start receiving a $1,600 monthly benefit. These payments will supplement your annuity income.
How to Boost Your Retirement Income
Retiring at 45 with $1 million is feasible, but doing so might mean scraping by month to month. Fortunately, you can increase your income in the following ways:
Delay Social Security Benefits
You can modify your Social Security benefit by choosing what age you’ll start receiving it. Specifically, you can pick between 62 and 70, with 70 providing the highest possible payment. However, you don’t have to wait the entire time to have an advantage. Each year you delay your Social Security after 62, you increase your benefit by 8%. So, waiting until 66 can increase your Social Security check by 40%.
Get a Better Interest Rate
If you keep a portion of your money in certificates of deposit (CDs) or savings accounts, maxing your interest rate means getting a higher return on investment. Recent inflation trends mean you can procure a high-yield savings account with an interest rate of 4% or higher, meaning you don’t have to risk a dime in the stock market to see healthy returns. Plus, you’ll pay regular income taxes on interest income instead of capital gains taxes.
Understand Your Income Tax Implications
Retirement income streams have varying tax consequences. For example, a Roth IRA incurs zero income tax, while a traditional 401(k) means paying regular income taxes on distributions.
However, retiring at 45 means you likely won’t use those financial instruments because they prevent use for retirees under age 59.5. Instead, you’re more likely to use brokerage accounts, savings accounts, and annuities, to name a few. Brokerage accounts incur capital gains taxes, but you can access your funds at any age.
On the other hand, savings accounts and annuities incur regular income taxes. That said, annuities come in non-qualified varieties that have lower taxation. As a result, you must understand your tax circumstances to retire comfortably.
How to Make Your Savings go Further in Retirement
After laying out a basic plan, you might realize how tight your financial situation would be if you retired at 45. So, here are some tips to help your money go further:
Create a Budget
Budgeting is an essential tool that will make your savings last. By keeping track of your expenses and comparing them to your income, you can follow one of the golden rules of personal finance: spend less than you make. Thankfully, many apps and programs are available to make budgeting easier. If your bank has a mobile app, it likely offers a budgeting tool.
With a budget in place, your spending habits won’t induce anxiety or guilt. Instead, you can account for unnecessary expenses in your budget, such as going to the movies or doting on family members. In other words, you can spend on nonessentials while living within your means by designating a budgetary item for treats and splurges.
Choose Low-Fee Investments
High fees kill the profitability of your assets. Annuities, mutual funds, exchange-traded funds, and real estate investment trusts (REITs) can have high administrative costs. So, it’s crucial to understand the fee structure of any financial instrument before placing your money in someone else’s hands. Doing your homework can put thousands of dollars back in your pocket each year. In addition, robo-advisors generally charge minimal fees, making them an excellent passive management option.
Care for Your Health
Healthcare costs are a significant financial factor in retirement. While healthcare expenses are a part of life, taking advantage of preventative care can help manage when and how you receive care. By being proactive through routine checkups and regular exercise, you can reduce the number of trips to the hospital, which is beneficial for your well-being and your wallet.
As shown in the example above, part-time work can be a lifesaver for early retirees. A part-time job can help you combat inflation and earn some extra spending money. This strategy is especially helpful if you don’t yet qualify for Social Security.
Pay Off Debt
Debt inhibits your financial capabilities, especially if left unaddressed. For example, credit card balances and student loans can hinder your financial progress by acting like the opposite of investments, where high interest rates cause them to grow at an alarming pace. In this situation, accumulating savings is harder because investing is unlikely to yield a return higher than your debt’s APY. Therefore, it’s crucial to prioritize paying off high-interest debts, whether you’re trying to save for retirement or afford life during your golden years.
If you have multiple debts, you can use one of two strategies to pay them off. The first is the snowball strategy, where you pay off your smallest balances first and then use the freed-up funds to pay down larger debts. Alternatively, you can use the avalanche strategy, where you focus on paying off debts with the highest interest rates first, ultimately saving you money because high rates accumulate more debt.
Retiring at 45 with $1 million means utilizing investment vehicles you can access at an early age, such as annuities, brokerage accounts, and savings. In addition, you must accurately estimate your expenses to ensure your income is sufficient. Lastly, because a $1 million nest egg is on the smaller side, you’ll need to get creative with how you generate income until you reach Social Security eligibility.
Tips for Retiring at 45 With $1 Million
- Investing $1 million for retirement means you can’t afford to make mistakes. Each dollar needs to provide a 5% return or higher, and finding profitable assets can be challenging. Fortunately, help from a financial advisor is easily accessible. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Putting $1 million into an annuity can mean receiving $50,000 or more per year for life. However, annuities are complex financial instruments, so here are the pros and cons to consider before purchasing one.
Photo credit: ©iStock.com/shapecharge, ©iStock.com/PeopleImages, ©iStock.com/PeopleImages