$1 million doesn’t go nearly as far in retirement as it once did. In fact, a recent survey found that investors believe they’ll need at least $3 million to retire comfortably. But retiring with $1 million is still possible, even as early as age 55, if you’re smart about it. It will require some careful planning since you’ll have to wait 10 years for Medicare, but it can be done. If you’re not sure how to get started, consider working with a financial advisor.
The Extra Costs of Retiring Early
A million dollars is a fantastic nest egg, but when planning for retirement, people often count on receiving Social Security checks and Medicare. If you retire at 55, you’ll have several years before you become eligible for either. Medicare doesn’t kick in until you’re 65 and you won’t qualify for full Social Security payments until you’re 66 or 67, depending on your birth year.
You can opt to start taking your Social Security benefits when you turn 62, but Medicare can’t be rushed without a serious disability. This means you’ll have to cover your insurance and medical expenses out of pocket for your first seven years of retirement, which could take a bite out of your $1 million nest egg.
Another consideration is that a longer retirement simply costs more. When you retire at 55 rather than waiting until 66, your savings will need to cover 11 extra years of expenses and 11 fewer years of income. Despite these caveats, wise financial planning should enable you to retire at 55 with $1 million in savings.
How to Plan Your Retirement
To plan your retirement, you’ll first need to estimate your lifespan. If you retire at 55 and live an average lifespan of 79 years, your savings will need to last 24 years. You can use the 4% rule to see what this would look like. This rule says if you spend no more than 4% of your retirement savings each year, adjusted for inflation, your savings should last for 30 years.
Now, 4% of $1 million is $40,000. If you own your home and live in a low-cost-of-living area, this might be enough. You can also use a calculator to see what your Social Security payments will look like. Between your savings and Social Security, you could live quite comfortably — but remember, you’ll have at least seven years before you begin to receive Social Security checks. If that doesn’t sound like enough for you to live on, you might need to make some major lifestyle changes to retire at 55.
That said, the 4% rule is a simplified rule of thumb. Many experts note that it’s not the best method for planning your retirement, and should only be a starting point. You can take a more in-depth look at your unique financial situation with a retirement calculator or by talking to a financial advisor.
You should also plan for taxes. According to the Financial Industry Regulatory Authority (FINRA), here are the five main tax areas that might impact retirees:
- Social Security taxes: Whether or not you owe taxes on your Social Security payments depends on your overall retirement income and whether you file joint or separate tax returns with your spouse. Use this worksheet from the IRS to determine whether your Social Security benefits will be taxed.
- Pension taxes: You will owe income tax on your pension funds in the year you withdraw the money.
- Retirement account taxes: You’ll owe income tax on withdrawals from a traditional IRA or 401(k) in the year you make the withdrawal. On the other hand, Roth IRAs and Roth 401(k)s are funded with after-tax dollars, which means you won’t owe any taxes on the money you withdraw.
- Estate plan taxes: You should start thinking about what money or other assets you hope to pass on to your loved ones. Sometimes bequeathing assets before your death can be beneficial to all parties, including tax benefits for you.
- Other taxable accounts: The tax bill will become more complicated if you have other taxable accounts with investments that generate capital gains or interest income.
How to Improve Your Retirement Prospects
Retiring at 55 with $1 million is well within the realm of possibility, but you’ll need to have a good financial plan. You can set yourself up for success with these tips:
- Lower your fixed expenses: If you’re worried about how long $1 million will last, you can cut your costs significantly by downsizing your home, moving to an area with a lower cost of living or paying off debt before you retire.
- Diversify your investments: Having a diversified investment portfolio is a great way to minimize risk and maximize return.
- Get expert advice: A financial advisor will be essential in creating an investment strategy if you want to retire early.
If you hope to retire early with $1 million, it’s certainly doable, but you should have a sound understanding of what your expenses and income in retirement will look like. Plan ahead and bring in an expert if needed so you can enjoy your retirement without any significant financial surprises.
Retirement Planning Tips
- When you’re planning out your finances for retirement it can be as important to look at spending. T. Rowe Price says to start by assuming you’ll spend 75% of your pre-retirement income. However, a financial advisor can help determine an accurate spending expectation for retirement. 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.
- If you’re not sure how much you need to have saved for your golden years, consider using SmartAsset’s free retirement calculator. Our tool will give you an estimate based on when you plan to retire, how much you’re currently saving, your annual retirement expenses and more.
- Looking to relocate so you can retire early? Check out SmartAsset’s recent study on the Best Cities for an Early Retirement.
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