How to retire at 40: Crucial tips to fast-track retirement

If you’re like many working adults, you’re probably tired of the rat race and wondering how to retire at 40. But is it really possible? 

Well, yes. 

With the right plan and strong determination, you can set yourself up to extend retirement by a decade or more. It’s possible, but it’ll require aggressive tactics that go far from the past penny-pinching advice you typically hear. You'll have to be honest with yourself about how determined you are to reach that goal – it won’t be easy.

Below, we’ve outlined some crucial tips, including identifying how much money you need saved to retire at 40 and choosing the right Financial Independent Retire Early (FIRE) approach.

Figure out how much it costs to retire at 40

Before focusing on the best saving method for early retirement, you should pin down a “never work again” number to build your strategy around.

While the general rule of thumb for retiring at 65 is to have about 10x your current annual salary saved up, that may not stretch across the twenty extra years you’ll be spending in retirement. Instead, we recommend taking an expense-first approach: Based on inflation and the fact that Americans spent $72,967 on average in 2022, you can expect your first year of retirement to cost about $75,375 and then increasingly more as time passes. 

And since the average American life span is 76 years, you should plan for at least 36 years of retirement. That adds up to a total retirement cost of $4,904,685. Of course, your expenses will vary based on your ideal lifestyle and long-term needs, but you can use this figure as a general guide for retirement planning.

Choose your retirement planning approach

Now that you have a general idea of what your expenses might look like, you can strategize. When it comes to early retirement, there are two popular approaches: fatFIRE and leanFIRE. Both stem from the original FIRE method, which stands for Financial Independence Retire Early.

The better choice between fatFIRE and leanFIRE is subjective and depends on your personal goals and retirement lifestyle preferences. 

FatFIRE: Maximize your income for a life of luxury

Maximizing your income is a key facet of fatFIRE. This approach aims to build a large enough retirement fund to melt into a luxurious retirement without compromising your lifestyle or expenses. Sounds good, but you’ll have to grind and find solid ways to grow your wealth. Here are some options:

• Build your skills and experience so that you can leverage them for higher pay or a new job. You can take courses or obtain certifications that will make you more marketable in your industry. For example, people earning the Google Professional Cloud Architect certification bumped their annual salary to nearly $140,000 on average – not bad for a program you can complete in less than two months.
• Taking on side jobs or even a second job to supplement your income. With the booming gig economy, there’s no shortage of work for anyone willing to go the extra mile. Also, consider asking for higher pay if you’ve been at your company for a while or seek job opportunities with higher salaries or bonuses.
• Invest in a business idea and work towards growing your own revenue streams. This is a great time to monetize that niche interest you spend all your time on.

Good to know: Taxes can eat up a large chunk of your income and retirement funds. As you make more money, look for ways to reduce your taxable income and stay up-to-date on changes in tax laws and regulations that may impact your retirement savings. Avoiding retirement mistakes, like cashing out retirement funds too early, can also help free up funds you may need later. 

If the idea of grinding for the next 5 to 15 years makes your head hurt, you can also increase your income passively. With the rise of technology, investing has become significantly easier than it was a decade ago. You can now use robo-advisors to ease into the investing world and learn the basics. Of course, if your goal is to earn enough to retire at 40, you’ll have to take a more active, aggressive approach – more on that later.

LeanFIRE: Budget like crazy for a modest retirement

On the other hand, leanFIRE emphasizes extreme frugality and a more modest budget, which allows you to retire at 45, 40, or even retire at 30 with a smaller nest egg. This approach might be ideal for low-income earners and individuals who don’t want to take on a lot of financial risk. Hypothetically, this approach could help you retire at 40 with as little as $2,000,000.

Since a major feature of leanFIRE is to reduce spending, being debt-free is essential to success here. We recommend using the avalanche method to get mounting debt under control. With this method, you’ll tackle your highest-interest debt first, paying it off as quickly as possible. You’ll lose less money to interest fees, which you can reallocate to retirement planning. Remember, every dollar counts when it comes to building a secure financial future, so don't let debt hold you back.

The other main pillar of leanFire is budgeting for a minimalist life – before and during retirement. Here are a few tips to help you retire early with less pressure to build wealth:

• Audit your current expenses and look for areas that you could sacrifice. For example, maybe you could slice $100 off your weekly grocery bill by using store-brand products.
• Adopt the 50/30/20 rule – it suggests putting 50% of your income toward nonnegotiables, like rent, 30% toward spending, and 20% toward investments and savings accounts.
• Using that rule, develop a realistically tight budget. If you need help sticking to it, you could use tools like a budgeting app to stay on top of your spending.
• Plan ahead by adapting this budget to your expected retirement expenses and spending. Use this preview of how you’ll use your money to inform what you do with it now.

Hire an advisor and create a foolproof plan

By now, you know that retiring at 40 requires some serious planning and a solid financial strategy. One of the most important steps you can take is to find a trustworthy and reputable advisor or firm that has a history of helping people reach early retirement goals. 

A good financial advisor can help you:

• Assess your financial health
• Identify your retirement goals 
• Create a plan to keep you on track 

And with such an accelerated timeline for retirement planning, you’ll likely find that a trustworthy financial advisor is worth it. That is if you vet them first. 

Before trusting anyone with your financial future, look at reviews and testimonials from other clients and check their credentials. There are many types of financial advisors with varying proficiency – the right person can save you precious time and money.

Once you’re happy with your choice, hit the ground running. Work together to develop a comprehensive plan that considers your current financial situation, your goals for retirement, and any potential risks or challenges. They can also provide guidance on investment strategies, tax planning, and other key areas that can affect your retirement savings. 

Use tax-efficient investments to build wealth

Investing is a crucial component of any early retirement plan. This part of retirement planning is where most wealth-building strategies come into play. If you’re working with a financial advisor, communicate your goals to them and work together to establish an aggressive investment plan that aligns with your time horizon, goals, and risk capacity and tolerance.

For a lower-risk approach, consider investing in low-cost index funds or exchange-traded funds (ETFs) that offer broad market exposure and lower fees. You can also look for opportunities to invest in real estate or start a side business to generate additional income streams. You’ll want to regularly review and rebalance your portfolio to make sure you’re still on track for your early retirement goals.

If you have higher risk tolerance and capacity, consider riskier investments, like jumping on initial product offerings (IPOs), foreign emerging markets, and venture capital. Once you’ve settled on a portfolio you’re happy with, consider holding onto those investments for over a year to take advantage of capital gains tax rates, which range from 0% to 15%. With this strategy, investors can save thousands in income taxes.

Since you have less time to recover from major losses, we recommend aiming somewhere in the middle – Lower-risk assets to ground your portfolio with just enough high-risk investments to increase your potential for growth. But, choosing the perfect balance is only part of a good investing strategy – tax efficiency can do wonders for your investment income.

Here are some tax tips to protect your earnings from Uncle Sam:

• Grow more of your retirement funds tax-free with a mega backdoor Roth.
• Round out your portfolio with tax-free investments, like municipal bonds.
• Pay less in capital gains tax by selling your losing investments to offset wins with a strategy known as tax-loss harvesting.
• Hold onto well-performing investments for at least a year to reduce your capital gains taxes.
• Read up on foreign tax credits and withholding taxes before investing overseas.
• Record all your investment transactions and check with a tax professional before making new investments. 

Plan for the unexpected

Planning for the unexpected is an important part of preparing for early retirement. While you may have a solid retirement plan, unexpected events like illness, natural disasters, or market downturns can impact your financial stability. 

You’ll want to keep an emergency fund in place to cover unexpected expenses and to protect your retirement savings. Consider saving enough in a high-yield savings account or money market fund to cover at least six months’ living expenses. Also, consider purchasing disability insurance and long-term care insurance to protect against unexpected events. 

Expenses that may pop up during retirement:

• Early long-term care: These costs can become overwhelming if you have to pay for long-term care, like a nursing home or assisted living, earlier than expected.
• Medical expenses: Even with Medicare, out-of-pocket expenses for healthcare can be significant, especially as you age and require more medical attention.
• Home repairs and maintenance: As you age, your home may require more frequent repairs and maintenance, which can be costly.
• Natural disasters: In a natural disaster, like a tornado or flood, you may face unexpected expenses related to repairs, rebuilding, or relocation.
• Family emergencies: Unexpected family emergencies, like a child or grandchild’s financial crisis, can impact your retirement savings.
• Market downturns: Market downturns can impact your savings and require you to adjust your retirement lifestyle.

Can I retire at 40 with $1 million?

While it is possible to retire at 40 with $1 million, you must plan for a leaner retirement lifestyle. Your investments can generate about $28,000 in income each year, so they’re essential to a comfortable retirement.  

You may also need to save money each year and take on more risk with your investments. Consider taking the leanFIRE approach, emphasizing frugality and a more modest budget.

The Playbook take 

Retiring at 40 may seem impossible to many adults, but the right financial strategy and mindset can make all the difference. You can confidently fast-track your retirement plan by identifying how much you’ll need to save, choosing between fatFIRE and leanFIRE, maximizing your income, and planning for the unexpected. 

While retiring early may require more elbow grease, it can give you more control over your future and when you do with it. Use the tips in this article to take the first steps towards retiring at 40 and then follow up with a personalized financial plan.

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