Can I Retire At 40 With 1 Million Dollars? (Yes, But Read This First!)

In 2022, the average retirement age was 61 years old. That's 21 years longer than retiring at 40. But don't let that deter you! Many people reach financial freedom earlier and decide to retire before reaching the average retirement age.

The historical S&P average annualized returns have been about 11.88%. So if you have $1,000,000 investing in the stock market, you will likely get an average of approximately $118,000 in interest every year. For many people, that's enough of a yearly income. But if you have bigger bills, debt, or live in a higher cost of living area, $118,000 may not stretch as far.

However, this does not include social security and passive income, like rental income or dividends. It also doesn't account for future inflation. But on average, $118k is a great yearly income.

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The typical social security check is around $2,993 if you retire at age 65. But there are a few caveats with social security checks. First, the average amount assumes that you've worked since the age of 22, and have earned a maximum income of $147,000 a year. And your benefit depends on how much you’ve earned and when you start taking out benefits.

You can claim your benefits early, at age 62, if you've contributed 10 years of work. But the full retirement age is 65. And if you wait until 70 to claim your benefits, you can earn even more.

Is it possible to retire but also keep on working? Absolutely! Retirement simply means that you don't HAVE to work anymore if you don't want to. But if you want to fill your days with volunteer work, consulting, freelancing, or even a part-time job that you thoroughly enjoy, that's okay too.

Dealing with your day-to-day finances is easier when you have a full-time job with a consistent income. But once you retire, it may be difficult to know your yearly income and expenses, especially when retiring early.

So you should make an "ideal" budget, one where you can live comfortably and not draw too much of your retirement funds down. A great way to do this is to speak with a financial advisor. They can look at the bigger picture and help you create a better plan for retirement and your budget.

No one wants to make debt payments during retirement, especially high-interest payments to credit cards or personal installment loans. These payments can also take a major toll on your monthly budget, which means less money for fun during retirement.

The earlier you pay off your debt, no matter what it is, the better you can live during retirement. But of course, if you can't pay off everything before retirement, at least focus on high-interest debts that will take a large chunk of your income.

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Earning passive income each month can help you stretch your million dollars further when retiring at 40. But what really is passive income?

A few examples are:

• Earning money from investment properties

• REITs

• Earning dividends from stocks

• A passive income business — like courses, ebooks, etc.

There are many other options for passive income, but these are just a few that can help you get started.

Will you really need a three or four-bedroom home once you retire? Will you need to live in a large city like New York City or Chicago? Or, can you downsize your living situation and save on housing and living costs?

Not everyone will have a larger home or want to downsize, but it's something to consider when saving money, especially if you plan on living on less or traveling during retirement.

When you start withdrawing money from your 401(k) or other retirement accounts, you'll have to pay taxes on some of that. But it's possible to lower the tax hit and save on taxes, capital gains taxes, and premiums.

For example, the money you withdraw from a Roth 401(k) account is not taxable income. So many people follow aRoth IRA conversion ladder to save on their taxes. Of course, talking to a financial advisor is important to see what will work best for you and how you can save money on taxes each year.

Another way to lower your tax bill in retirement is to move to a place with lower (or no) tax rates.

The following states don’t charge income tax:

• Florida

• Tennessee

• Texas

• Wyoming

And these states don't have local or state sales taxes:

• Delaware

• Montana

• New Hampshire

• Oregon

Of course, you'll also want to look at property taxes or other taxes that you may pay during retirement, as those costs can also vary. If you want to retire overseas, these countries don't charge American expats tax based on a few factors:

• The Bahamas

• The British Virgin Islands

• Maldives

• Monaco

• Panama

• Portugal

Some countries charge a low tax rate for American expats, so those may be worth looking into as well. And as long as you withdraw your money smartly, you may be able to live tax-free during your entire retirement.

Even if you don't retire until 65, health care expenses can cost a small fortune. Between monthly premiums, deductibles, and coinsurance payments, you will be responsible for just about everything until Medicare kicks in. And even then, it's important to know what's covered and what's not.

• So, how will you afford healthcare expenses before you qualify for Medicare, and will you need other insurance options like vision or dental?

• Can you cut costs by being self-pay for certain checkups or procedures?

• And, how much money will you need each month to keep up with these healthcare costs?

Knowing what your plan will be upfront can save you money in the long run and get you to 65 without severe health issues or problems.