Editor’s note: This is part two of an ongoing series throughout this year focused on how to retire early and the FIRE movement. The introduction to the series is How to Retire Early in Six Steps.
Many people want to retire early by 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 retirement planning 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. As the expert on financial risk, Nassim Nicholas Taleb, put it: “The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”
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 early by 40
Today, aiming for early retirement by age 40 has become a popular goal. However, retirement data from 2016 to 2022 gathered by The Motley Fool revealed that only 1% of Americans between 40 and 44 are retired.
This highlights the challenge of retiring by 40. Yet, it remains achievable, requiring 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. The Bureau of Labor Statistics’ Consumer Expenditure Survey found the average American spent $24,298 on housing and $12,295 on transportation. To cut costs, you may want to consider living with roommates or using public transit instead of owning a car.
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.
For perspective, participants in a recent survey said that the "magic number" for a comfortable retirement is almost $1.5 million, according to participants in a recent survey.
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 like IRAs and 401(k)s, which may offer an employer match.
The stock market, represented by the S&P 500, 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.
One option is to save or convert existing funds to a Roth IRA for tax-free withdrawals. Additionally, you can utilize Substantially Equal Periodic Payments (SEPP) under IRS Rule 72(t), which allows for penalty-free withdrawals from retirement accounts before age 59½ under certain restrictions.
Plan for healthcare
One of the biggest challenges of early retirement is healthcare since employer-sponsored coverage ends and Medicare isn’t available until age 65.
Options for maintaining coverage are limited. They include extending your employer’s insurance through COBRA, which can be costly, or purchasing a plan from the healthcare marketplace, which may offer more affordable choices depending on your income and location.
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.
