Retiring at 40 may sound like a dream come true, but even with $4 million in your bank account, it’s important to have a plan for the future. You’ll need to plan out the next half of your life with a clear financial picture in order to truly retire at such a young age. Here are some of the most important questions to ask yourself before you clock out of work for good. If you’d like individualized help planning for retirement, consider working with a financial advisor.
Is $4 Million Enough to Retire at 40?
As of 2023, the life expectancy for the average American was 76.4 years—73.5 for men and 79.3 for women, according to the CDC. Let’s say that you live to the age of 80. Even if you don’t invest your millions to generate any returns, you can spend $100,000 a year for 40 years before your money runs out.
Of course, you don’t want to run out of money at 80 with years ahead of you. With a well-planned investment portfolio, you may very well be able to live quite comfortably off the returns generated by the principal. This means that your $4 million can sit untouched and you can live off the interest and earnings.
For instance, the stock market’s S&P 500 Index has returned an average of 6.5 to 7% per year after inflation for the past 200 years, according to McKinsey. If you invested your $4 million there, 6.5% returns would mean $260,000 per year—like a comfortable sum for most to live on in retirement.
Of course, stock market crashes, poor budgeting and other issues can decimate millions of dollars quicker than you might think. Here are some of the biggest factors you should consider if you’re planning to retire at 40 with $4 million.
1. Plan Wisely for the First Few Years
If you leave the workforce at 40, there are some things to be aware of in the first several years of retirement. First of all, people often spend more in early retirement, then spend less over time as they age, according to a Fidelity analysis of data from the Bureau of Labor Department.
This period of higher spending coincides with an age when government programs won’t be available to you. The earliest age at which you can begin to receive Social Security benefits is 62 and Medicare won’t kick in until age 65. You’ll need to plan to cover your insurance and medical costs without government assistance for 25 years and plan to live without Social Security income for at least 22 years.
Additionally, many of the most popular retirement savings vehicles will also not be available to you without penalty. Penalty-free withdrawals from 401(k) plans and IRAs are available after the age of 59 ½, meaning you should plan to pay 20 years of expenses without touching those accounts.
2. Prepare for the Unexpected
As mentioned above, stock market returns on average can generate a healthy retirement income, but you’ll want to be prepared for events outside of your control. In a market crash, a large portion of your portfolio may essentially disappear and take a long time to reconstitute itself.
According to Morningstar data, the average time it takes for an asset class to recover can vary widely, with many bouncing back after six months. However, others take much longer, with some taking as many as 13 years to fully recover their value.
This is just one of many market pressures that can create challenges for you in retirement. Inflation can also wreak havoc on your retirement savings. According to an inflation calculator, $50,000 in April 1993 had the same buying power as about $105,000 thirty years later. That means in 30 years, the value of your savings could essentially be halved. This is a good argument to be more conservative than you think might be warranted when planning your retirement.
3. Prioritize Diversification
One straightforward solution to the above challenges is a diversified portfolio. If you only invest your money in stocks, the good times may be very good, but the bad times will likely be very bad. If you invest your money in a wide variety of assets, you can mostly insulate yourself from the vagaries of the market.
Think about your ideal asset allocation. You can use a tool like SmartAsset’s asset allocation calculator to get an idea of what your investment breakdown should be based on your risk tolerance and other factors. You should consider different asset types, such as stocks, bonds and mutual funds and holding onto some cash.
You should also diversify within each type—instead of just one company’s stock, you should own multiple stocks in multiple sectors and regions. Instead of just owning 5-year bonds, you should own bonds of multiple durations. Also consider investing in assets that are more immune to inflation, such as real estate investment trusts or Treasury Inflation-Protected Securities.
The idea is that by spreading your money around, you can mitigate the risks of investing while still generating healthy returns. And when you have enough cash and conservative investments on hand, you will be better able to ride out the ups and downs of the market without having to sell assets at a loss.
4. Budget Well
Perhaps the easiest way you can run out of money far too soon is with flagrant spending. While a wisely-invested $4 million should provide you with a six-figure income for the rest of your life, lavish vacations, expensive hobbies or multiple homes can quickly deplete your savings.
You can use SmartAsset’s budget calculator to make sure you have a sound plan for your spending in retirement. There’s no reason you can’t enjoy the finer things in life, but you’ll need to make sure it fits into the big picture of your financial situation. Make a plan for how you’re going to spend your retirement income and stick to it to ensure the coffers don’t run dry.
The Bottom Line
Retiring early with $4 million is very possible, but requires some planning. Make sure you enter your retirement with a diversified investment portfolio, a smart budget and a plan for how to navigate the years before many traditional retirement benefits are available to you. Consider careful planning with a professional to make sure you’ve thought about everything before retiring early.
Retirement Savings Tips
- A financial advisor can help you take care of your finances when you’re retired. 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.
- How much do you need to save to fund your eventual retirement lifestyle? If you’re scratching your head at the question, consider using SmartAsset’s retirement calculator.
Photo credit: ©iStock.com/ferrantraite, ©iStock.com/pekic, ©iStock.com/Ridofranz