It won't be easy, but it's possible

Quick Summary

  • You can retire by 40, but it takes a lot of planning (and saving) to do so.
  • Crunch the numbers to find out how much you need to save each month to retire early—and then decide if that’s feasible.
  • If you have trouble saving that amount each month, you need to find ways to spend less and earn more.

When it comes to retirement, it’s never too soon to start planning. According to Merrill Lynch, the average retirement costs $738,400. And another study from the Employee Benefit Research Institute found that 37% of Americans think they’ll need at least $1 million to enjoy a comfortable retirement.

If you plan to retire at normal retirement age—typically 66 or 67 for most people—you likely have several decades to save. If you’ve set a goal to retire by 40, on the other hand, your time to get your financial ducks in a row just shrank dramatically. But that doesn’t mean you can’t do it. Here’s how.

A couple looking at their laptop to retire by 40.

Envision Your Ideal Retirement

Retirement means something different to everyone. If you plan to retire by 40, you need to think about how you’re going to spend the next as-many-as four decades, assuming you have a normal life expectancy.

Do you plan to travel part of the year, for example, or become a full-time nomad? How will your day-to-day spending habits change? Will any of your expenses go up or down? Do you want to volunteer or start your own nonprofit? Will you still work part-time or do you have plans to launch a business?

All of these things can affect how much money you’ll need to save for the future. Once you’ve thought it through, you can dig into the numbers.

Set Your Savings Goal

Nailing down a savings goal is difficult enough under normal circumstances. But it’s considerably more so if you want to retire early. One rule of thumb recommends multiplying your desired annual income in retirement by 25 to come up with a savings goal. So, if you want to have $50,000 a year for 25 years, you’d need $1.25 million. If you’re looking at an extra 20 years in retirement, you’d need $2.25 million instead.

Of course, you may be able to set the numbers a little lower if you’ll have money coming in from a side hustle or a business in retirement. Take a second look at your budget to see if you can get by with less income each year (that’s one reason some people retire abroad). And be sure you factor in Social Security payments once you reach your 60s.

Break Down Your Monthly Savings Rate

Once you have an idea of what the long-term goal is, look at how much you already have saved and how long you have until you turn 40. This gives you a framework for how much you need to save each year and each month to get there.

Let’s say you’re 25 years old, making $50,000 a year, you’re just beginning to save, and you want to save $1 million. If you save half of your income each month, you’ll have about $660,000 when you retire at 40. That will give you about $1,150 a month over 45 years of retirement.

Keep in mind that this is an overly simplified example. It assumes a 6% return for the 15 years before you retire, and then equal monthly withdrawals for the next 45 years.

That $1,150 month could be hard to live off unless you’re willing to cut your lifestyle significantly. Of course, once you hit age 62, you can start collecting Social Security benefits (but you’ll 10 years of earnings to qualify). And if you have that side hustle or business in retirement, that will help, too.

If You Need to Save More

Retiring on $1,150 a month will work if have other sources of income. But you’ll need to aim even higher if you want to have enough money to live off each month once you retire. If you need to save more, you’ve got two options:

  • Trim down your expenses as much as possible. Getting a roommate or two, selling your car and using public transportation instead, or canceling your cable TV can reduce your outflow.
  • Work on increasing your income and saving the extra money. You could increase your hours at work, take on a part-time job or start a side hustle to add to your cash flow. If those aren’t options, you can always try selling things you don’t need for extra savings.

Choose the Right Savings Vehicles

If you’re saving on a shorter time frame, you need to be strategic about where you put your money. Your employer’s plan is an obvious choice, especially if your company gives you a matching contribution. Let’s say you make $50,000 a year and start saving at age 25. You save 35% of your income in your 401(k), and your employer matches 100% of the first 6% of your contributions. By age 40, you’d have almost $535,000 if you earn a 7% annual rate of return.

That’s only about halfway to your $1 million goal, but you can make up some of the difference by investing in a Roth IRA. Using the current annual contribution limit of $6,000, you could add another $147,000-and-change to your retirement nest egg, assuming a 7% annual return. From there, you could continue saving and investing in a taxable brokerage account.

The bottom line when it comes to retiring by 40 is that you have to be proactive. Run the numbers and take advantage of every opportunity to save. The sooner you start planning, the better the odds of retiring early with the kind of nest egg you’re aiming for.

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