Is $3 Million Enough to Retire at 40?

Depending on your goals and plans, $3 million can be enough to cover early retirement at 40. However, certain factors will affect whether $3 million is enough. For example, your retirement needs and life expectancy play a big role. Here’s how to invest it to cover healthcare, housing and lifestyle.

For help planning your retirement, consider working with a financial advisor. 

Understanding Early Retirement and Financial Independence

What the Social Security Administration calls full retirement age varies based on when you were born, but if you were born in 1960 or later, the retirement age is 66 or 67. In other words, if you retire at 40, you will be retiring many years before most Americans. Early retirement is an alluring concept, as it may allow you to pursue a different line of work or a passion project.

It’s worth noting that early retirement is not the same as financial independence. Financial independence refers to the point where your passive income is at least equal to your expenses. As your passive income grows, it may eventually exceed your expenses. At this point, work becomes optional, and you can choose to leave your job. This is why financial independence and early retirement often go together.

However, increasing your passive income isn’t the only way to achieve early retirement. You can also do it by reducing your expenses or by working part-time as a self-employed person or a freelancer. While there are many ways to achieve financial independence and early retirement, the idea is that you no longer depend on a paycheck to survive.

Factors Affecting Retirement Needs

To know whether $3 million is enough to retire at 40, you must estimate your financial needs in retirement. While you may not have a crystal ball, you can think about retirement and what challenges you might face during that time.

The largest consideration is your living expenses. For example, you must estimate your expenses for housing, food and transportation. You should also account for healthcare expenses, which can be significant in retirement. The rule of thumb is that you will need as much as 80% of your current income in retirement, but these expenses can vary widely depending on location and individual circumstances.

You should also consider your life expectancy, especially if you have a chronic condition or need long-term care.

Consider your goals and desired lifestyle in retirement. For instance, if you want to live a luxurious lifestyle full of travel, buying a second home or pursuing expensive hobbies, prepare for higher expenses.

How to Retire at 40 with $3 Million

Retiring at 40 might sound difficult, but it might be achievable with the right strategies. Here are some ways to achieve your goals:

Saving Strategies

There are a few key saving strategies you can employ to achieve your goal of retiring at 40 with $3 million. The most important one is to start early if possible. This gives you time to take advantage of compound interest. The next is to invest as much as you can in retirement accounts, which have some advantages that taxable brokerage accounts lack. The last is to increase your income by seeking a promotion or a high-paying career. This will let you invest more in your retirement accounts.

Investment Strategies

Having the right investment strategies is also key if you want to retire at 40 with $3 million. It’s important to diversify your portfolio by investing in a mix of assets, such as stocks, bonds and real estate so as to make your portfolio more resilient during downturns. However, given your long time horizon, it’s key that your portfolio has a significant allocation of growth-oriented securities, like equities. Aim to keep a lid on costs by, for example, investing in low-cost index funds.

Other Factors to Consider

You should have adequate insurance for things like healthcare until you qualify for Medicare. Also, consider buying disability and long-term care insurance.

You should also keep inflation in mind. At approximately 5% in early 2023, the consumer price index means the size of your nest egg is taking a hit.

Lastly, consider part-time work if you want to make your retirement more secure. This does mean trading some of your time for money, but it can help you maintain your lifestyle and reduce the amount you need to withdraw from your savings and investments.

The Bottom Line

Retiring at 40 with $3 million may not be easy, but it’s possible with the right strategy and tactics. Through a combination of reducing expenses, increasing income and smart investments, you can accelerate your savings to retire sooner. Just remember to estimate your expenses before you retire by considering things like housing, transportation, food and healthcare. And don’t forget to maintain adequate insurance, which can protect you against large bills after you retire.

Tips for Retirement

• A financial advisor can guide you through major financial decisions, like determining your investing strategy. 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.
• Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s retirement calculator can help you estimate how much money you will need in retirement.