Is It Possible to Retire By 40 If You’ve Banked $2 Million?
If you have achieved a $2 million nest egg by the time you turn 40, no matter how you got there, congratulations, you’ve made it to the big leagues. This is an excellent amount of money to have saved, and it absolutely begs the question of how much more time you need to spend working? […] The post Is It Possible to Retire By 40 If You’ve Banked $2 Million? appeared first on 24/7 Wall St..
If you have achieved a $2 million nest egg by the time you turn 40, no matter how you got there, congratulations, you’ve made it to the big leagues. This is an excellent amount of money to have saved, and it absolutely begs the question of how much more time you need to spend working?
If you are someone who has $2 million in the bank by the time you turn 40, congratulations!
The hope is that this money is enough to live comfortably and retire early.
As long as you keep your cost-of-living in check, you can likely retire comfortably and not run out of money.
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Key Points
As multiple studies have found that the average US retirement age is around 62, a $2 million bank account could allow you to step aside and have 22 years to enjoy life to the fullest before your friends start retiring. Of course, the first thing you need to know is whether or not it’s truly possible to retire by 40 if you have this amount tucked away.
Safe Withdrawal Rate
The safe withdrawal rate is the biggest factor determining whether or not you can successfully leave the workforce at 40. Generally considered to be a 4% withdrawal from your principal every year to live on, at this percentage, a 40-year-old would have around $80,000 to live on pre-tax every year for roughly the next 30 years.
However, there are some caveats here: depending on how the $2 million is set up, some of the money might be in a tax-advantaged account. Alternatively, if only 4% is coming out, there is also a big opportunity to continue investing the remaining principal to grow the money while you enjoy retirement.
You also have to consider that there will be a point, starting at 62, that you can begin to draw Social Security for a small income boost. If you retire at 40, you won’t be eligible for the largest dollar amount, which requires at least 35 years worth of working, but there is no question that you would get something to add to your monthly income and lessen the load on the principal.
Enjoy A Comfortable Retirement
If you want to enjoy a comfortable retirement at 40, with $2 million in the bank, you should look at a moderate or medium cost-of-living environment. For example, in 2025, the average cost of living in Florida, in areas like Tallahassee, will be $50,689. The same goes for Texas, where the annual cost of living is around $45,114, and these are just two state examples where you would choose cities with nice weather to comfortably retire and have some money to spare.
If you make the choice to move to one of these areas, not only can you live comfortably, but you also have to remember that you are still earning some money through investments. At a 7% annual rate or return in the market with $2 million, you’re looking at close to $7.6 million by the time you turn 65, which means $304,000 per year under the 4% rule.
The bottom line is that with or without market growth, if you go with a more medium-cost-of-living location, you’re likely spending as much as 10% to 20% less than you would in a higher-cost city.
The best case is for you to be someone with little to no debt, including student loans, credit cards, and maybe even a paid-off home. Without a mortgage, which likely consumes around 33% of retiree budgets, on average, you could save thousands per month and even more yearly. This all adds up to securing a comfortable retirement at $2 million.
When $2 Million Won’t Work
At $2 million, you might even think that it’s okay to look at some higher-cost-of-living cities like Miami, Fort Lauderdale, or, at a stretch, New York City. Unfortunately, these cities would require north of $100,000 per year, if not closer to $200,000. In other words, anywhere you would need more than $80,000 to live comfortably is out.
If you really wanted to stretch your budget to $100,000 and make the bare minimum in most of these locations, you’d be looking at only having, at most, 25 years before draining your accounts without any investments.
The same goes for any instance where you want to put away money for health insurance costs, which only get more expensive as you get older. Experts estimate that for 25 years of private health insurance, you are talking about as much as $500,000 in expenses, or one-quarter of your entire account balance before you are eligible for Medicare.
Lastly, you have to consider family expenses. If you support older parents or younger children, your $80,000 annual living allowance will be stretched to the absolute limit, no matter where you live.
The post Is It Possible to Retire By 40 If You’ve Banked $2 Million? appeared first on 24/7 Wall St..
