Is $4 Million Enough to Retire at 40?

When sitting on a $4 million nest egg, it might seem substantial, but its adequacy hinges on how you plan to manage and allocate these funds over potentially several decades of retirement. Understanding your annual expenses, expected returns on investments, and potential unforeseen costs is crucial in determining whether this amount will sustain your desired lifestyle. Additionally, considering the impact of inflation over time is essential, as it can erode purchasing power.

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.

How To Retire at 40

Retiring by the age of 40 might sound great, but it’s not an easy thing to do without a lot of planning and understanding of what you’re going to need for the rest of your life. Here are some things you should do to make sure that you’re able to retire when you want.

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 Statistics.

This period of higher spending coincides with an age when government programs will not 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.

Tips to Help You Save More for Retirement

Planning for retirement can feel overwhelming, but with the right strategies, you can build a secure financial future. By taking proactive steps today, you can ensure that you have the resources you need to enjoy your golden years. Here are some practical tips to help you save more for retirement.

Start saving early: The earlier you begin saving for retirement, the more time your money has to grow. Compound interest can significantly increase your savings over time, so even small contributions made early can lead to substantial growth. Starting early also allows you to take advantage of employer-sponsored retirement plans and potential matching contributions.
Maximize employer contributions: If your employer offers a retirement savings plan with matching contributions, aim to contribute enough to receive the full match. This is essentially free money that can boost your retirement savings. By maximizing these contributions, you can significantly increase your retirement fund without additional personal expense.
Diversify your investments: Diversifying your investment portfolio can help manage risk and improve potential returns. Consider a mix of stocks, bonds, and other assets to balance growth and stability. Diversification can protect your savings from market volatility and ensure a more secure financial future.
Regularly review and adjust your plan: Periodically reviewing your retirement plan allows you to make necessary adjustments based on changes in your financial situation or goals. Life events such as marriage, having children, or career changes can impact your retirement needs. Regular reviews ensure that your savings strategy remains aligned with your long-term objectives.
Reduce unnecessary expenses: Cutting back on non-essential spending can free up more money for retirement savings. Create a budget to identify areas where you can reduce expenses and redirect those funds into your retirement account. Small lifestyle changes can lead to significant savings over time.

By implementing these strategies, you can take control of your financial future and work towards a comfortable retirement. Remember, the key is to start early, stay informed, and make consistent contributions to your retirement savings. With dedication and planning, you can achieve your retirement goals.

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 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.