Let us imagine a scenario. You have just turned 40 and have 3 million dollars in your bank account. You might have just sold your business, got money from inheritance, or saved 3 million dollars from your job.

And now you have decided never to work for the rest of your life.

Before we pose the question, is 3 million dollars enough to retire at 40? Let’s take a look at some stats.

The average life expectancy for people in the U.S. is just above 79 years. Considering that you do slightly better than average and live up to 90 years, you must survive for 50 years with that 3 million dollars.

If you decide to put all your money in a savings account (pays close to nothing on returns) and live off that money, you will have $ 60,000 ($5,000/month) every year to spend until you run out of money.

We will not consider Social Security Benefits, Medicare Insurance, funds in Roth IRA, or other income sources like pensions or royalty payments. These things will be different for different people, so we will try to survive for the next 50 years just by using the $3 million that we have.

Your spending habits, how many people you must look after, and where you decide to live after retiring will significantly determine how long the $3 million lasts.

$60,000 in yearly expenses is doable (if you have a house, zero debts to pay, and live in an affordable city). But, living under $60,000 per year gives you very little room to spend money on extra stuff like paying for unexpected medical conditions that might come as you age, taking trips to exotic places, or paying for an impromptu surprise party for your spouse’s birthday. Also, with rising expenses and inflation, you will have difficulty living comfortably by spending money directly from your savings account.

The average annual income of a full-time employee in the U.S. is $76,770. So, let’s assume we will spend $80,000 a year in expenses, which will be enough if you don’t have addictive gambling or shopping habits.

We can generate income by investing our money. We need a large sum of money to rely solely on investment income as our only income source. But is $3 million large enough to sustain us for the next 50 years? Let’s take a look at the history.

The S&P 500 has returned a historic annualized average of around 10.26% from 1957 to 2023. The table below shows the average annual returns (including dividends) of the S&P 500 for the last 10, 20, 30, and 40 years as of December 31, 2023:

This does not mean investing in the S&P 500 is risk-free or guaranteed to generate positive returns in any given year. (Like -36.55% decline in 2008, -21.97% drop in 2002, and the -43.34% plunge in 1931). However, as history has shown, the index tends to recover from short-term downturns and benefit from long-term growth trends.

Considering the risks and taking the worst-case scenario, let’s assume our capital generates an average 7 % annual return for the next 50 years.

That makes us $210,000 per year before taxes.

The tax rate will differ for different states, but let’s assume a 35% tax on our income. So, we are left with $136,500 per year after tax.

Our yearly expenditure is $80,000 per year. That leaves $56,500 to reinvest.

This is amazing. We just retired this year and added $56,500 to our capital.

But before you celebrate. Hold on. Next year, our expenses will rise, and the calculation will look a little different.

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Here is the inflation rate in the U.S. from 2014 to 2023.

The average inflation rate for the last 10 years is 2.66%.

Let us assume the worst-case scenario and take a 3.5% average inflation rate. So our spending is going to increase by 3.5% every year.

Here are the details for the calculation:

Starting Capital: $3,000,000
Annual Return Rate: 7%
Tax Rate: 35%
First Year Spending: $80,000
Inflation Rate: 3.5%

Using: Cn = (C[n-1]*0.07(1-0.35) – S[n-1]) + C[n-1]

Capital at the end of 50 years is $240,461.80

So, our 3 million dollars would be reduced to $240k after 50 years. But more than likely, we would have a lot more left than just $240k after 50 years because of the following reasons:

• The tax rate will be much less if you live in a state that has zero state tax and if you file jointly with your spouse. Also, tax will be significantly less after the capital is reduced to a certain level because it generates fewer returns.
• After some years, we would have aid from other sources like Social Security Benefits, Medicare Insurance, and Roth IRA.
• Considering the data from the past, the average inflation for the next 50 years will probably be less than 3.5%, and our return on the S&P 500 index will probably be more than 7%.

So, $3 million will be enough to retire at 40.

Many studies have shown that Americans don’t save enough for their retirement. According to data from the Federal Reserve, the average retirement savings amount in the United States is $65,000. The same report has shown that 28% of American adults have no retirement savings.

But don’t worry.

Work on Passive Income

One of the primary concerns for retirees is how to maintain their income and lifestyle without being actively employed. Diversifying your income sources by incorporating passive streams such as dividends, royalties, rentals, or online businesses gives you steady income without the active involvement of your time.

Changing your hobby or passion into an income stream is a great way to add extra revenue. For example, you can create a YouTube channel or write blogs on the topic that you are interested in.

• Different Ways To Make Passive Income
• How I Made $57,000 By Selling Low-Content Books

Invest Early

If you invest $500 per month for 30 years at an interest rate of 10% compounded annually, you will end up with $1,518,924.18. But if you invested the same amount of money for 20 years, you would have $472,774.77. So, you can see the stark difference in earnings just by starting the investment early.

You have to start investing as soon as you start to earn money. No matter how small the earnings might be, invest a certain percentage of income every month. So, when you retire, you will have a fair chink of money in investments that you can rely on.

Here are some tips to start investing early:

• Save at least 10% to 15% of your income and increase it as you earn more.
• Open a retirement account, such as a 401(k), IRA, or Roth IRA, and contribute to it regularly.
• Choose a diversified portfolio of low-cost, high-return investments, such as stocks, bonds, mutual funds, or ETFs
• Rebalance your portfolio periodically and adjust your asset allocation according to your risk tolerance and time horizon.
• Avoid emotional investing and stick to your long-term plan.

Find New Purpose and Meaning

Retirement is not only a financial transition but also a psychological and social one. Getting away from your daily work routine can soon get empty and depressing. So, finding new purposes and hobbies is crucial.

These are some steps that you can take to make the most out of your retirement days:

• Join a fitness club: Healthcare is one of those areas where you will spend most of your money, especially as you age. Joining a fitness club will help you stay healthy and minimize healthcare costs. It will also give you a sense of achievement as you hit your fitness goals.
• Meditate: Retirement can be a great opportunity to explore your inner self without the constraints of your career or other obligations. I would recommend taking the Vipassana Meditation Retreat if you are thinking about taking a meditation retreat.
• Travel to new places: Retirement provides you with enough time to explore new places and cultures. By traveling the world, you can find more diversity and excitement in your retirement. Just make sure you are within your budget when you travel.
• Deepen your relationships: With career obligations, spending quality time with our loved ones might be challenging, but retirement provides free time to spend more time with our family and friends.

Retirement can be a wonderful and rewarding phase of your life if you plan and follow these tips. By working on passive income, investing early and wisely, and finding new purpose and meaning, you can have a better retirement and enjoy it to the fullest.

I hope you liked the post!

Thank you for reading.