How to Retire at 40
Authors: Jacob Schroeder
Source: Kiplinger
Many people want to retire at 40 — or even younger. A recent conversation with an eight-year-old reshaped my perspective on modern views of work. When asked what he wanted to be when he grew up, he didn’t choose typical professions like a doctor or a police officer. Instead, he simply said, “Retired.”
The FIRE (Financial Independence, Retire Early) movement, while not a playground buzzword, has clearly permeated broader culture as a viable life strategy. Online communities dedicated to financial independence are thriving, with some subreddits amassing members in the hundreds of thousands and even millions.
While the basics of a retirement checklist for your 50s and beyond are still relevant, many thirtysomethings are captivated by the prospect of leaving their jobs to enjoy freedom over their time.
Despite fears of a retirement crisis casting doubt on the feasibility of retiring at all, advancements in technology and access to financial tools have simplified the process of accumulating wealth.
Retire at 40
Retiring at 40 is achievable but it requires a deep commitment to short-term sacrifices for long-term benefits.
If you decide to take this route, the path will depend on personal factors like income and lifestyle, but anyone striving to retire early can adopt the general steps.
Save like it's your job
While traditional planning advice recommends saving 10-15% of your income for retirement, FIRE advocates often aim for up to 50-70%.
Achieving this level of savings is ambitious and requires comprehensive adjustments across all areas of your financial life, including cutting expenses and boosting income.
Embrace smart spending
To maximize savings, eliminate unnecessary spending on things like unused memberships and subscriptions. But large expenses also need reevaluation.
However, this doesn’t mean forgoing all pleasures. Being frugal is about smart spending, not self-denial. People tend to quit goals that are too restrictive. Just be vigilant with non-essential expenses and especially debt, as it directly undermines your progress.
Finding a community of people who share your cost-cutting values may help you share resources, stick to your goals, and avoid loneliness when you finally do retire.
Boost your income
Earning more money is another way to raise your savings rate. Some strategies include negotiating a raise, seeking a better-paying job, freelancing or launching a side business.
You may also want to consider passive income sources, like vending machines (industry data shows the typical vending machine generates over $300 a month!), which can boost income without demanding more time.
Set a savings target
Of course, retiring early isn’t as simple as celebrating your 40th birthday and calling it quits. To retire comfortably by 40, you must first calculate your estimated living expenses, considering inflation, healthcare costs, housing and other personal expenditures. Online FIRE calculators can help you create your retirement number.
Stay calm and invest on — aggressively
Investing is essential to grow your savings and outpace inflation. Common investment strategies for early retirement include maxing out retirement accounts.
The stock market has an average return of about 10% per year dating back to 1957. Therefore, investing most of your portfolio in stocks, such as broadly diversified mutual funds, may help maximize growth.
Taking greater investing risk can lead to larger fluctuations in your portfolio. However, try to stay calm, knowing that historically, stocks have rebounded after every downturn.
Strategize your withdrawals
Retiring by age 40 requires not just reaching your savings goal but also managing your withdrawals effectively to ensure your funds last. This means carefully planning withdrawals to minimize taxes and avoid early withdrawal penalties.
Don't forget the non-financial: purpose, leisure and fun
Early retirement isn’t just a financial decision but also a lifestyle one. Consider how you will spend your time, maintain social connections and fulfill personal goals without the structure of full-time employment. Research associates a strong sense of purpose with greater longevity, happiness and overall well-being.
So, what will give your life in retirement meaning?
How to retire by 45
Does retiring early by 40 sound a little too ambitious? Retiring at 45 offers a bit more flexibility. Studies show that working even just a few years longer can increase retirement income and even your lifespan.
You still want to implement strategies like increasing income, aggressive saving and smart investing. But this additional time allows for compounding investments and more contributions to retirement accounts.
Additionally, the extra years provide a buffer to refine your withdrawal strategies and solidify healthcare plans, easing the transition into early retirement.
These steps show that retiring by age 40 demands considerable focus and dedication. So, for a little inspiration, I leave you with the words of writer Annie Dillard: “How we spend our days is, of course, how we spend our lives.” By committing to diligent saving, you can transform your working days into days spent enjoying more of life.
This article was written by Jacob Schroeder from Kiplinger and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
