How to Retire at 40

Editor’s note: "Retire at 40 or 45" is part two of an ongoing series focused on how to retire early and the FIRE movement. The series introduction is titled "How to Retire Early in Seven Steps." To see all early retirement articles, jump to the end.

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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 hundreds of thousands to millions of members.

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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. As an 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 that cast doubt on the feasibility of retiring at all, advances in technology and access to financial tools have simplified the process of accumulating wealth.

Retire at 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 showed that only 1% of Americans age 40 to 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 such as income and lifestyle, but anyone striving to retire early can follow the general steps.

Save like it's your job

While traditional retirement planning advice recommends saving 10% to 15% of your income, FIRE advocates often aim for 50% to 70%.

Achieving this level of savings is ambitious and will require comprehensive adjustments across all areas of your financial life, including reducing expenses and increasing income.

If you want to check your retirement savings progress relative to other workers, check out the average 401(k) balance by age and the average IRA balance by age.

Embrace smart spending

To maximize savings, eliminate unnecessary spending on things such as unused memberships and subscriptions. But large expenses also need re-evaluation. The Bureau of Labor Statistics’ Consumer Expenditure Survey found the average American spent $26,266 on housing and $13,318 on transportation. To cut costs, you might 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 give up on goals that are too restrictive. Just be vigilant about non-essential expenses, especially debt, as it directly undermines your progress.

Finding a community of people who share your cost-cutting values might help you share resources, stick to your goals, and avoid loneliness when you finally do retire. Do you want to be the youngest person on the pickleball court by 20 years?

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 might also want to consider passive income sources, such as vending machines (industry data show the typical vending machine nets about $250 a month), which can boost income without demanding more time.

Set a savings target

Retiring early isn’t as simple as celebrating your 40th birthday and calling it quits. To retire comfortably in your forties, you must first estimate your living expenses, accounting for inflation, health care costs, housing and other personal expenditures. Online FIRE calculators can help you create your retirement number.

For context, participants in a recent survey said the "magic number" for a comfortable retirement is about $1.26 million.

To find your retirement goal number, plug a few figures into Kiplinger's retirement calculator.

A narrow road in a dark, overgrown forest. Botany Bay old oak tree road at night in Edisto Island, South Carolina, USA.

Plan for health care

Paying for health care is one of the biggest challenges of early retirement since employer-sponsored coverage typically ends when you leave your job, and Medicare isn’t available until age 65.

Think of it like the dark forest of Mirkwood in The Hobbit; you've got to stay focused on the path, move forward and hope some creature shambling in the dark doesn't get you. In this case, though, the beast is a serious, costly illness. Its power has been strengthened by soaring premium prices for coverage on the Affordable Care Act's health care marketplace.

You might also explore extending your employer’s insurance through COBRA, though this option can be costly.

As much as possible, maintain a healthy lifestyle and take every measure to protect your family's health. Recognize that one risk of such an early retirement is that, if you become disabled, you'll need to rethink your health care and recognize that you might need to pay for long-term care as you age.

We've also calculated the average cost of health care by age to help you plan ahead.

Stay calm and carry on investing — 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 might offer an employer match.

The stock market, as represented by the S&P 500, has averaged about 6.7% per year since 1957 (adjusted for inflation). Therefore, investing most of your portfolio in stocks, such as broadly diversified mutual funds, might help maximize growth.

Taking a greater investment 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.

For more tips, consult our article on early retirement withdrawal strategies for the long haul.

Don't forget the nonfinancial: purpose, leisure and fun

Early retirement isn’t just a financial decision but also a lifestyle one. Consider how you'll spend your time, maintain social connections and fulfill personal goals without the structure of full-time employment. Research shows that a strong sense of purpose is associated with greater longevity, happiness and overall well-being.

What will give your life meaning in retirement?

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 a few years longer can increase retirement income and lifespan, especially for men.

You still want to implement strategies such as 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 health care plans, easing the transition into early retirement.

These steps demonstrate that retiring at age 40 or 45 requires considerable focus and dedication. 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.