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.
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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The article delves into the feasibility of retiring comfortably at 55 with a $4 million nest egg. Achieving this goal involves meticulous financial planning, discipline, and an understanding of various economic factors. Let's break down the concepts embedded in this discussion:
Financial Requirements for Early Retirement:
- Accumulation of $4 Million by Age 55: This requires disciplined saving, potential lifestyle adjustments, and an aggressive investment strategy.
- Healthcare Expenses: Private health insurance is a necessity until Medicare eligibility at 65.
- Social Security: Accessing Social Security benefits typically starts at 62, creating a gap for early retirees.
- Penalties on Early Withdrawals: Early access to retirement accounts before 59.5 might incur penalties and tax implications.
Factors Affecting Retirement Readiness:
- Income Benchmark: Advisers often suggest using 70% of pre-retirement income as a starting point to estimate post-retirement expenses.
- Safe Withdrawal Rate: A strategy of withdrawing 3.3% to 4% of the nest egg in the first year of retirement, adjusted for inflation, aims to sustain savings over 30 years.
- Withdrawal Estimations: With a $4 million portfolio, withdrawing $132,000 to $160,000 annually at age 55 may exceed typical income needs.
Challenges and Strategies:
- Savings and Investment Strategy: Merely saving 10% of income might not suffice; higher savings and a more aggressive investment approach may be necessary.
- Tax-Advantaged Retirement Accounts: Early withdrawals from 401(k)s and IRAs could incur penalties and tax implications.
- Dependency on Portfolio Withdrawals: Relying heavily on the portfolio for income before Social Security eligibility may pose risks during market downturns.
- Healthcare Expenses: Private health insurance premiums might be a significant expense until Medicare eligibility.
Conclusion and Recommendations:
- Viability of Early Retirement: With $4 million in savings, early retirement at 55 seems feasible, although initial years may lack Social Security benefits and incur penalties on withdrawals.
- Financial Advisor's Role: Seeking guidance from experienced financial advisors can aid in strategizing for retirement.
- Alternative Strategies: Considerations like relocating to lower-cost cities post-retirement may enhance purchasing power.
The article presents a comprehensive view of the financial, healthcare, and investment aspects related to early retirement. It underscores the significance of meticulous planning and financial advice to achieve a comfortable retirement by age 55, emphasizing both the possibilities and challenges involved.
