Retiring at 40 with $2 million is an ambitious goal, but that doesn’t mean it’s impossible. While you’ll need a decent salary or other sources of income or wealth, saving $2 million is not out of reach. If you plan on retiring at 40 with $2 million in savings, this guide can help you prioritize finances and maximize investments for a comfortable retirement.
A financial advisor can help you manage your retirement savings and plan for the future.
Is Retiring at 40 with $2 Million Possible?
Retiring at 40 with $2 million is possible, though it is a lofty goal, especially if you don’t have a large inheritance or some other windfall. But it can be done if your income is high sufficient and if you are aggressive with your savings strategy.
It’s also worth noting that the numbers shown here don’t account for other potential income sources, like Social Security, Medicare, and annuities. And that’s because, for example, you won’t be eligible for Social Security at the age of 40.
You would have to wait until you’re 62 to get Social Security. Or you can wait for your full retirement age at 66 or 67 years old, depending on your birth year to receive full Social Security benefits.
As for your Medicare, you won’t be eligible for Medicare at the age of 40. You have to wait until you’re 65. However, with annuities, you can cash out annuities. But if you do so before the age of 59 1/2, you will deal with a 10% withdrawal penalty.
How to Retire at 40 with $2 Million
Now that we’ve managed our expectations around retiring at 40 with $2 million, let’s get into how to make that a reality. In addition to investments, we’ll also consider lifestyle, diversification, and other sources of income.
Do You Have Dependents or Fixed Costs?
As you enter retirement at age 40, there may be a lot of activities that you and your family may want to engage in, whether it’s going on vacation or saving up for college. If you are on your way to paying off your mortgage, it will help create more room to put your child or children through college without student loans.
If you are renting an affordable apartment that isn’t expensive in comparison to your income, that also can create additional savings over the long term. Making sure that you leave enough room for major expenses like auto repairs and home repairs can go a long way.
And leaving money on the side to create an estate plan will help keep generational wealth opportunities for your children and grandchildren.
Planning For Healthcare Costs
Accidents happen and healthcare costs, even with a healthcare plan can be costly. And as you get older, your healthcare costs will get more expensive, which makes it a critical part of your expenses by default. When you reach the age of 65, you will be eligible for Medicare, which can assist you in picking up a lot of the costs.
But even though you likely have enough money to cover your healthcare expenses as it is, you want to make sure that you spend on healthcare wisely. Continue to search for healthcare plans that help you cut costs annually in order to have a relaxing retirement.
Consider Retirement Account Taxes
Retiring early doesn’t mean you should forget about taxes if you decide to withdraw from your 401(k) before the age of 59 1/2 for example. You will owe taxes each year you decide to withdraw money from it. So it’s better to rely on other sources of income before going that route.
And even though you’re retired with a lot of money, you still have to look out for Social Security taxes when you’re eligible to receive payments at the age of 62. A lot of your Social Security taxes will depend on your income status as well as if you decide to file separately or jointly with your spouse.
Estimate Your Retirement Savings
The first step is to estimate your retirement savings. If your goal is $2 million by age 40, you’ll have to start aggressively setting money aside. In this table, we assume that you start with no money, start investing at age 22, and invest for 18 years until age 40 when you will retire.
If you will solely rely on investments for retirement income (although that is unlikely), below are some possible scenarios. You don’t start to arrive at $2 million until the bottom of the table.
Average Returns (in percentages)
Keep in mind that this is a very simplified example. It assumes you won’t have any help from things like a pension, Social Security, an employer 401(k) match, etc. Any or all of these things could give you a boost, meaning you may not need as much money to retire comfortably.
Prioritize Retirement Savings
If your goal is to retire at 40 with $2 million, prioritizing retirement savings is a must. If you receive a large inheritance, that mark is slightly easier to attain, but it will likely still be challenging.
In fact, saving $2 million by age 40 might require some steps that border on the extreme, especially if you don’t start wealthy. Nevertheless, you have two basic options if you want to reach your goal:
- Increase your income. There are many ways to make more money, but the easiest is probably to start by asking for a promotion at work. If that’s not an option, you can pick up a side job or leave your current job for one with higher pay.
- Reduce your expenses. There are many options to reduce your budget. For example, move to a cheaper area, sell expensive cars and replace them with cheaper ones, or switch to cheaper insurance plans.
Diversify Your Portfolio
Lastly, it’s a good idea to diversify your portfolio, so you aren’t relying entirely on stocks. This is especially true as you get older and transition into retirement. Stocks have some of the best potentials for growth, but they can also be volatile.
If the stock market takes a dive and you aren’t diversified, you could find that your retirement is in jeopardy. Some safer assets you might add to your portfolio include bonds, cash, annuities, and certificates of deposits (CDs).
Retiring at 40 with $2 million is an ambitious goal, especially if you don’t have a head start. It can be done, but you will have to dramatically increase your income, reduce your expenses – or both. Then, you will have to save as much as possible. The task will be easier if you have Social Security, a pension, an employer match, etc. Nevertheless, retiring at 40 with $2 million is a high bar that probably won’t be easy to reach.
Tips for Retirement
- A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three 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.
- Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.
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