With smart money management, retiring at 55 years old with $6 million could be a breeze. But a lot of work has to go into the strategies you make and the actions that you take. That also includes how you handle your finances in case of an emergency. So if you have it, $6 million will definitely work. Here’s how to think about it.
For more hands-on help, consider working with a financial advisor who can help create a financial plan for your investments.
Can You Retire Early With $6 Million?
Whenever calculating your retirement prospect, there are two important issues to consider: withdrawals and emergencies. Essentially, will you have enough money to replace your income? And will that leave you with enough flexibility to pay for a sudden expense?
The rule of thumb for figuring all this out is that you should expect to replace 80% of your working income while in retirement. You generally need less money than when you were working because you have fewer responsibilities and expenses, plus you aren’t contributing to a retirement fund anymore.
So an 80% target should give you the same degree of spending power and emergency flexibility that you have right now.
For example, let’s say you made $150,000 per year during your working life; we’ll assume a higher-income household since you have saved up $6 million. You would want to plan for a retirement account that can generate $120,000 per year throughout your retirement (80% of $150,000).
Even without returns of any kind, just coasting on principal, a $6 million portfolio can pay you $120,000 per year for 50 years. For someone who retires at 55, that will give you retirement savings to live until you’re 105 years old and this is even before we account for Social Security.
As you get older, once you hit your 90s perhaps, you might want to begin economizing a little bit, but otherwise this is a very comfortable amount of money. Of course, there are two more issues to consider: lifestyle and returns.
Returns Change The Math In Your Favor
Perhaps the most important, and most undervalued, aspect of in-retirement financial planning is this: Your portfolio will continue to generate returns throughout your retirement.
At the higher end, if you invest entirely in the S&P 500 you can expect a lot of volatility but long-term returns of 10% – 13% per year. At the lower end, if you invest entirely in bonds you can expect low volatility but long-term yields of 1.6% per year. And if you split the difference to invest in annuities, you can expect guaranteed payments that range based on the specific institution and contract.
With a $6 million portfolio, those returns would come out roughly to:
- S&P 500 Index – $600,000 per year in capital gains returns, with periodic losses
- Bonds – $96,000 in yield payments, with losses quite rare
- Annuities – Potentially $300,000 per year in payments, guaranteed by the insurer
It’s important to note two things with bonds. First, most of the time you don’t need to worry about the value (otherwise known as the return) on bonds. You aren’t trying to sell them, just collect the income from their coupon payments, so fluctuations in the bond market won’t be a big concern for your portfolio.
Second, these are long-term instruments, but not as long as your retirement. When various bonds expire, you will need to decide whether to keep the cash they generate or buy new instruments.
Lifestyle and Expenses
Without diving too deep, it’s important to understand that your needs will have to be balanced with your lifestyle. If you have saved up $6 million, the odds are that you are a high-income household. That means that you likely have a relatively expensive lifestyle to maintain. Now, based on the returns of a $6 million portfolio, it’s likely that you can do this. Even choosing the middle-of-the-road option with an annuity will generate $300,000 per year, enough to be comfortable.
Just make sure that this matches your specific needs. This portfolio can generate a lot of returns and principal, but how much is enough will depend on your individual circumstances. Someone with quiet tastes and low costs of living will have a very different financial footprint than someone who likes to travel and who lives in San Francisco or Manhattan.
The best way to think about this is by looking at your personal budget. How much do you spend right now on your costs of living? Those numbers may go down. Other costs, especially health care needs, may go up. So make sure you have a good margin for error.
Losses Of Early Retirement
The major factor when it comes to retiring at age 55 is your opportunity cost.
Specifically, remember this: Compound returns mean that most of your portfolio’s growth happens in your later years. Retiring earlier means that you sacrifice all of these potential gains.
When you retire, your first decision will be when to claim Social Security. You should plan on doing this at age 70 because that will maximize your benefits. If you cannot wait until 70 to begin taking Social Security you may be able to make a different plan, but most likely you should reconsider early retirement.
Your second will involve health care. If you’re like most Americans, you get health insurance through your employer. Since Medicare doesn’t begin until 65 you will need to find private insurance, and that typically costs several hundred dollars per month. Make sure to budget for this in your plans.
Finally, be sure to account for your losses in future earnings. Retirement means three major things for your portfolio. First, you switch from adding new money to taking money out. Second, you likely shift it to a more conservative series of investments.
Third, your gains no longer compound the way they used to. Instead, your portfolio’s returns begin to replace your income rather than adding to the principal of your assets. This makes a big difference.
Bottom Line
Yes, $6 million is more than enough to retire at age 55, especially with smart money management and budgeting. Just make sure you are aware that this will involve sacrificing a lot of potential gains in your portfolio overall.
Investment Tips
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- Building an investment portfolio is not an easy venture. But if you want your investments integrated with a financial plan, a financial advisor with a certified financial planner (CFP) certification can help you. These advisors often deal with tax planning, retirement planning, estate planning and more.
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