Can I Retire at 40 with $1 Million?

The FIRE movement (Financial Independence, Retire Early) has gained a lot of traction in recent years. And workers are increasingly opting out of the labor force at younger ages to live their best lives without being shackled to a job.

Of course, it's easy to see why retiring at a very young age is appealing. Doing so means you can do things like travel or pursue hobbies at an age when health and mobility issues are less likely to be a concern.

If you've reached the age of 40 and have $1 million to your name, you might assume that you can exit the workforce for good and kick off an early retirement. But that $1 million may not last nearly as long as you expect it to.

Why $1 million just isn't enough

It's one thing to exit the workforce at age 65 with a $1 million IRA. At that point, your savings might easily last throughout retirement, and the fact that you'll also be eligible for Social Security should help, too.

But retiring at age 40 with $1 million is a very different story. And even if you keep that money invested in a brokerage account, you may find that you're not able to sustain the lifestyle you want without rapidly depleting your assets.

Let's say you assemble a $1 million portfolio of dividend-paying stocks. If your average dividend yield is 5%, which is on the high side for a lot of stocks, that amounts to an annual income of $50,000.

But if you're a 40-year-old retiree, you're probably not spending your days sitting around the house watching TV. You're apt to want to stay busy by getting out, going places, and doing things. And an income of $50,000 a year may not lend to that, especially when you factor in your basic expenses like housing, transportation, and food.

Also, remember that if you retire at age 40, there's no Medicare to fall back on. You'll have to cover the cost of health insurance, and that could be exorbitant.

Now, you may be thinking, "Well, I don't have to only live on dividend income. I can sell stocks at a profit and live on that money."

Given that the stock market's average annual return over the past 50 years is an impressive 10%, that might seem doable at first. But remember, that 10% is the market's average over a long period of time. You can't bank on your portfolio delivering a 10% return every year, and if you liquidate investments for cash and shrink your portfolio, you'll risk setting yourself up for smaller gains year after year. That's not a good thing.

A shift in mindset and career may be a better approach

You may be eager to retire at age 40 so you're not tethered to a job you don't like, or a job you do like but takes up most of your time. But if you have $1 million saved by age 40, it means you're in a prime position to embark on a career shift that allows you to enjoy life without quitting the workforce entirely.

Let's imagine you earn $100,000 a year, and you're convinced you'll be able to live on $50,000. Rather than retire and rely solely on your $1 million portfolio for income, find a part-time gig that allows you to earn enough to largely cover your bills, and supplement with dividend income or cashed-out stocks as needed.

You may find, for example, that instead of plugging away as a full-time IT professional, you can start your own consulting business and work remotely for 20 hours a week instead of 40. You might cut your income in half, but that might be enough income to live on. And that way, you can free up time while you're young for the things you want to do, such as travel extensively.

The idea of retiring at age 40 may be appealing in many ways. And sure, if you have a $10 million portfolio, at that point, it may be feasible to never have to work again.

But a $1 million portfolio may not go as far as you expect it to. So before you make plans to end your career for good, think about the different ways you can get what you really want out of an early retirement without the financial stress that might ensue if you stop earning money entirely.