The answer to “How much money do I need to retire early?” depends on each individual. They will need to consider what they want and need in the future. For a 30-year-old prospective retiree, $2 million might be enough to live on. But the truth is, it’s most likely not a good choice for most people. While $2 million can generate a significant portfolio income, at age 30 you don’t yet have a good sense of your long-term needs and lifestyle. You have a long career and personal life ahead of you and a $2 million portfolio probably won’t give you the kind of security you need to make your own choices. To understand what your financial needs may be, consider working with a financial advisor.
Consider Your Potential Spending
First thing first, when you look at retirement you should consider it in the context of how much money you will need to spend each month in order to maintain your preferred lifestyle. For someone planning an ordinary transition from work to retirement, where they basically spend what they earn, the rule of thumb is 80%. That is, you should plan on drawing down 80% of your current income from your retirement account.
For someone who wants to retire very young, that plan doesn’t work. You are likely contributing much more to your retirement savings than the standard 10%. And, more importantly, you have no idea what’s ahead of you. Instead, do some math and figure out what income you will need to match your spending.
A few areas of spending to consider are:
- Family: At 30 you may not be married yet and it’s increasingly likely you have no children. If you do choose to start a family that will dramatically increase your costs. A spouse will double your household spending, although they may earn income. Children will mean daily expenses, medical care, college funds and more. All of this will explode your monthly needs.
- Home: Most young people who buy a first home do so in their 30s. This can be a mixed blessing. On the one hand, it can stabilize and even reduce your monthly spending, as a mortgage with a good interest rate can cost less than rent. On the other hand, you will need a down payment and the (often large) fixed costs that come with upkeep and maintenance on a home.
- Medical Care: As you age, you will begin needing more medical care. For most people, this won’t start at 30. People are remaining healthier longer these days, so with smart lifestyle choices you can count on at least a few more “young invincible years,” but not that many. Eventually, those bills will kick in and they’ll add up. And, of course, in the meantime, you will no longer have health insurance from your workplace. Individual insurance plans are expensive, so make sure to account for that in your budget.
- Lifestyle: How will you want to live? People who retire in their 60s typically want to travel and have adventures while they are still healthy and fit. You will have almost 40 more years to enjoy those experiences. That’s wonderful, but every plane ticket and hotel room will cost you. Consider the lifestyle you will want to shift into in retirement and what you’ll need to live it.
- Community: Your needs will depend on where you live. If you live in a rural or even more suburban, area, your money will go further and prices will be more stable. This will help you make retirement work, but you may find yourself financially locked into those lower-cost communities. On the other hand, if you live in a city, you will need much more money and you can expect rent to keep climbing every year.
- Inflation: Finally, at age 30 you should plan for a retirement that lasts at least 70 years (if not more). Over that kind of time, even a modest rate of inflation will significantly increase prices. At the Federal Reserve’s benchmark 2% rate, prices will double about every 35 years, which means you can expect that to happen twice during your retirement. Without solid portfolio growth, you can expect your spending power to fall, a lot.
- Unpredictability: The point of this very abbreviated list is this: At age 30, it’s extremely difficult to predict what your actual lifetime income needs will be. In large part that’s because you haven’t yet decided what your life will be. Especially if you work in a high-earning field, such that you can save up $2 million quickly, it’s common for people to spend their 20s focused on career and education, then their 30s figuring out their personal and home life.
With the big personal questions as yet unanswered, the big financial questions won’t be any clearer. And if you lock yourself into something new, for example deciding that you’ll afford retirement by not having children, make sure that’s a choice you’ll still be happy with in five, 10 or 20 years.
Consider Potential Income
That’s the spending side of the equation. Now, how about the income? The good news here is that $2 million per year can generate a decent amount of money, even if you just choose to live on your portfolio’s income and returns. And that will be necessary. If you choose to draw down on your portfolio, balancing a mix of returns and principal, then a $2 million portfolio will last about 35 years. That’s if you use the money to replace a median income, generating around $56,800 per year.
At that rate, you will be broke by age 65, just in time to retire all over again. Instead, consider building an income portfolio or a returns-oriented portfolio. This means either living entirely on the yield from income-generating assets like bonds and annuities or living entirely off the capital gains you make from selling assets while reinvesting the principal.
Understanding Medicare and Social Security
Finally, whenever considering your retirement options you should make sure to review how Medicare and Social Security will fit into your plans. For a 30-year-old retiree, the answer is simple: they won’t.
With Medicare, eventually, you will receive this government benefit and it will have real value. When you enter old age, you will qualify for the program (presumably at or around the current eligibility age of 65). This will significantly reduce your healthcare spending because you will no longer need to carry primary insurance.
The problem is that up until you qualify for Medicare, you will need to pay for insurance and all other costs of care. That will come out of your own pocket right through your early 60s. This means that you should consider Medicare a nice bonus, but not essential. If you can’t afford to pay for health insurance, you can’t afford to retire.
Social Security will also begin to make payments when you get older. In this case, given that the eligibility age has already been rolled back, it’s not unreasonable to expect that you will qualify later than the current full retirement age of 67. Whatever the date, though, eventually you will begin collecting those payments. But you won’t collect much. Having retired at 30, you won’t have banked many lifetime Social Security credits. This means you will collect very little in benefits.
As with Medicare, by the time you collect Social Security, you will have been retired for almost 40 years. Throughout those decades you will need to pay your bills and maintain your chosen lifestyle. If you plan on coasting into your 70s on fumes, relying on Social Security to replace a dwindling retirement account, then you simply cannot afford to retire right now.
In both cases, the outcome is the same. These programs are nice bonuses. Medicare will save you real money and Social Security will pay you a small amount of money. But if you are counting on them to save your financial future, then you need to keep saving in your financial present.
The Bottom Line
At age 30, a $2 million retirement account is wonderful. However, the odds are that it isn’t enough to retire on right now. Instead, keep working and saving and let it grow, because, by the time you’re 40 years old, it will probably be more than enough.
Retirement Saving Tips
- A financial advisor can help you build a comprehensive retirement plan. 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 have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Want to build this kind of retirement account? Sure! After all, who doesn’t want the problem of figuring out if they can retire early? Let’s get started with this eight-step plan.
Photo credit: ©iStock.com/MixMedia, ©iStock.com/AndreyPopov, ©iStock.com/PixelsEffect