Mark Henricks
·5 min read
A $4 million nest egg will likely allow you to retire comfortably at age 55. The major challenge will be accumulating that much capital by 55– about a decade before most people stop working. Other issues include the need to pay for private health insurance, a wait of at least seven years forSocial Security benefits and penalties on early withdrawals from tax-advantaged retirement accounts. A financial advisor can help you design a plan to pay for a secure retirement.
Is Retiring at 55 with $4 Million Possible?
The average age at which most people retire is 62, according to a 2021 Gallup Poll. But if you have $4 million in savings, it’s entirely possible to retire by age 55.
Retiring early offers a lot of advantages. Among them are better health, which likely means lower healthcare costs; improved ability to work part-time for extra income and fulfillment; and generally a more enjoyable and lengthy retirement.
The main reason more people don’t retire at 55 is that they lack adequate savings. Accumulating $4 million by 55 will take sacrifice, discipline, focus, planning and probably a measure of good luck.
Other drawbacks include delayed access to Medicare, Social Security and penalty-free retirement savings withdrawals. However, if you can save up $4 million and don’t anticipate an overly lavish retirement lifestyle, you can likely fulfill your dreams of dropping out of the workforce by age 55.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
How to Retire at 55 with $4 Million
In order to know whether you can retire at 55 with $4 million, you need to know how much you expect to spend after you stop working. One common approach is to use 70% of your pre-retirement income as a benchmark.
According to Bureau of Labor Statistics data, Americans between 55 and64 years old earned a median income of $61,204 per year, as of the fourth quarter of 2022. Seventy percent of this is $42,842. Of course, your actual income needs may be higher based on your healthcare expenses, where you live and various other factors.
The next question is how much income you can expect to generate in retirement. Many advisors use a safe withdrawal rate for estimation. According to this method, withdrawing between 3.3% and 4% of your nest egg in your first year of retirement and then adjusting subsequent withdrawals for inflation could safely stretch your savings for 30 years.
Following this guidance, you could safely withdraw between $132,000 and $160,000 from your $4 million portfolio at age 55. That’s more than three times the $42,842 that an average 55-year-old would need, suggesting your $4 million nest egg will be more than enough.
Obstacles to Retiring at 55 with $4 Million
Accumulating $4 million by age 55 is a challenge. The conventional retirement saving approach of putting about 10% of your income into a tax-advantaged retirement account and investing it in a target date fundmay not work unless you are an exceptionally high earner. You may need to significantly reduce your pre-retirement living expenses, save a lot more and adopt a more aggressive growth-oriented investment strategy.
Your ability to withdraw money from your tax-advantaged retirement accounts is another major challenge that early retirement poses. Taking money out of a401(k) planand individual retirement account (IRA) before age 59.5 typically requires you to pay a 10% early withdrawal penalty on the amount that’s withdrawn, plus any taxes due. Four-plus years’ worth of early withdrawal penalties can take a serious bite out of your retirement savings.
Another issue with retiring at 55 is that you have to be at least 62 in most cases to draw Social Security benefits. This seven-year gapcould leave you overly reliant on withdrawals from your portfolio, potentially exposing you to sequence of returns risk if the market takes a downturn.
Medicare is another valuable benefit that isn’t available for most 55-year-old retirees. Until you reach the usual qualification age of 65, your post-retirement budget will have to include paying premiums for private health insurance.
Bottom Line
You can probably retire at 55 if you have $4 million in savings. This amount, according to conventional estimates, can reliably produce enough income to pay for a comfortable retirement. However, at least in the early years you probably will have to get along without Social Security and either forego or pay penalties on withdrawals from tax-advantaged retirement accounts, while also paying premiums for private health insurance until you reach Medicare eligibility at 65.
Retirement Planning Tips
Preparing a plan to fund your retirement is a lot easier with the help of an experienced and qualified financial advisor.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.
One proven method for increasing your purchasing power in retirement is relocating to a lower-cost city when you stop working. SmartAsset’s guide to the lowest-cost cities for retirement can help point you in the direction of a comfortable retirement even if your income will be limited.
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As a financial expert with a deep understanding of retirement planning and wealth accumulation, it's evident that the article by Mark Henricks delves into the complexities of retiring at the age of 55 with a $4 million nest egg. Let me break down the key concepts discussed in the article and provide additional insights:
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Retiring at 55 with $4 Million:
- The central premise is that having a $4 million savings by the age of 55 can enable early retirement.
- Advantages of early retirement include better health, potential for part-time work, and a more enjoyable retirement.
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Calculating Retirement Needs:
- To determine if retiring at 55 with $4 million is feasible, understanding your expected post-retirement expenses is crucial.
- The article suggests using 70% of pre-retirement income as a benchmark.
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Safe Withdrawal Rate:
- Advisors often use a safe withdrawal rate for estimating post-retirement income. The recommended range is between 3.3% and 4% of the nest egg in the first year, adjusted for inflation in subsequent years.
- Applying this method, the article calculates a safe withdrawal of $132,000 to $160,000 from a $4 million portfolio at age 55.
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Challenges of Accumulating $4 Million:
- The article highlights that accumulating $4 million by age 55 is a significant challenge.
- Traditional retirement savings approaches, such as contributing 10% to tax-advantaged accounts, may not be sufficient, necessitating a more aggressive investment strategy.
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Penalties and Withdrawal Challenges:
- Early retirement poses challenges related to penalties on early withdrawals from tax-advantaged retirement accounts, such as 401(k) plans and IRAs.
- The 10% early withdrawal penalty before age 59.5 and potential taxes could impact retirement savings significantly.
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Social Security and Medicare Considerations:
- Early retirees may face delays in accessing Social Security benefits, as eligibility typically begins at age 62.
- Medicare, a crucial benefit, is not available for most 55-year-olds, requiring budgeting for private health insurance until Medicare eligibility at 65.
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Retirement Planning Tips:
- The article emphasizes the importance of retirement planning with the assistance of a qualified financial advisor.
- It suggests considering relocating to a lower-cost city to increase purchasing power during retirement.
In conclusion, while retiring at 55 with $4 million is deemed possible by conventional estimates, the article underscores the challenges, including the need for meticulous planning, disciplined savings, and consideration of potential drawbacks such as delayed access to Social Security and Medicare. The insights provided in the article align with best practices in retirement planning and underscore the importance of seeking professional financial advice.
