Retiring Early With $3 Million: What to Expect When You Stop Working

You can probably retire in financial comfort at age 45 if you have $3 million in savings. Although it’s much younger than most people retire, that much money can likely generate adequate income for as long as you live. Very little in finance is certain, however, and a 45-year-old’s ability to retire successfully with $3 million depends on a number of factors that can’t be predicted with certainty, including health and long-term inflation. If you want help planning for your retirement, consider talking it over with a financial advisor.

Is Retiring at 45 with $3 Million Possible?

The retirement age in the United States is about 64, so retiring at age 45 would make you an outlier. However, it’s not unheard of.

An analysis of data collected by the Federal Reserve for the 2017 edition of its “Survey of Household Economics And Decisionmaking” found that about 3.37% of people who currently consider themselves retired had stopped working between ages 45 and 49. This came to more than 2.25 million people who said they’d retired within a few years of turning 45.

Retiring at 45 is an attractive proposition. It likely means you’ll have more time to enjoy relationships, leisure and travel. For those with other passions such as volunteering and working on social impact initiatives, quitting work early can allow you to devote more time to these fulfilling endeavors.

How to Retire at 45 with $3 Million

Assuming you are 45 and have $3 million in after-tax dollars, a simple formula can suggest how much income you’ll have in retirement. For decades, a figure of 4% had been used to calculate a safe withdrawal amount in your first year of retirement. Morningstar has since suggested that 3.8% is a safer withdrawal rate.

However much money you choose to withdraw, the rest of your assets will remain invested and earning returns to fund future withdrawals. To account for inflation, your withdrawal amount should increase by the rate of inflation every year, so your purchasing power should not be diminished,

Assuming a 4% withdrawal rate and $3 million in savings, this will give you an annual income of $120,000 in your first year of retirement. Whether this will be enough depends on the lifestyle you have in mind.

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However, some experts recommend your annual retirement income should be about 75% of what your income was before retiring. Withdrawing $120,000 from your retirement savings would mean you earned approximately $160,000 per year while you were working.

If you do this, conventional wisdom dictates that your nest egg has a good chance of lasting for 30 years. Of course, if you retire at 45, this could mean you may run out of money by age 75, well before the age most people can expect to die. However, you can also probably count on Social Security benefits to contribute to your finances starting as soon as age 62, so you can reduce withdrawals of capital at that point.

Other strategies could also produce adequate retirement income. These include buying annuities and investing in dividend-paying stocks. It’s also possible to use a mix of techniques, putting some of your money into annuities and investing your remaining assets into a diversified portfolio, from which you would apply a safe withdrawal rate.

Consider matching with a financial advisor if you’d like to discuss your retirement strategy and goals with a pro.

Challenges of Retiring at 45 with $3 Million

Accumulating $3 million by age 45 is the first – and most obvious – challenge. Absent an inheritance or another windfall, building a $3 million nest egg will require a high income, some aggressive saving or both. You may need to save 20%, 30% or more of your salary to stop work at 45. To do that, you’ll have to slash expenses, generate additional income where possible and possibly take a more aggressive approach to investing in order to save $3 million.

Rules surrounding 401(k) withdrawals also pose a challenge for a 45-year-old retiree. Withdrawals from these accounts before age 59½ in most cases incur a 10% penalty, as well as payment of taxes owed.

Health insurance is another issue. Medicare is not available to most people before age 65, meaning you’ll have to factor health insurance premiums into your retirement budget.

Some other variables presenting potential problems include inflation and life expectancy. Inflation can reduce returns on stocks and similar investments when it is high and also lower the purchasing power of other income strategies. Most annuities, for instance, do not increase their payouts when inflation rises, although Social Security does.

And, while life expectancy can be estimated, no one knows for certain how long they will live. As a result, they can only approximate how long their nest egg will need to last. Everyone’s needs are different, so a financial advisor can help by giving you advice tailored to your circumstances and goals.

The Bottom Line

Retiring at age 45 with $3 million is quite feasible if you already have the money and your post-retirement income needs are not excessive. Accumulating that much money in time for such an early retirement will likely be challenging. Doing so may require a high income, a tight budget, extra income on the side or taking some chances with your investments in hopes of earning higher returns. Still, some people do accomplish it and the rewards can make the sacrifices worthwhile.

Retirement Planning Tips

Retirement planning can be complex so it’s a great topic to discuss with a financial advisor. SmartAsset’s free tool matches you with up to three financial advisors in 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.
Use SmartAsset’s Social Security calculator to tell you what you can expect from the government-run safety net. Your age, annual income, marital status and anticipated retirement age is all it needs to figure out what you can expect to receive each month in Social Security benefits when you stop working.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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