How much money do you need to retire at 40?

How much money do you need to retire at 40?

Who wouldn’t want to retire at 40? I mean, no more worries, work duties, just a simple, calm life. Or … is it? 

While retiring at 40 seems very tempting and promising, there are a number of factors one needs to consider when retiring at such a young age (relatively).

How much money do you need to retire at 40? A 2017 Merrill Lynch‘s study showed that the average retirement costs around $740,000. On top of that, the 2019 Retirement Confidence Survey showed that one-third of Americans assume they’ll need at least $1 million to live a happy retirement life.

But how does this relate to retiring at 40?

Usually, the “normal” retirement age for U.S citizens is around 65-67 years old. This means, that until that age they are actively working, and most likely saving money for after they retire.

If one were to retire much earlier than that, say 40 years old, this would mean a huge commitment to saving a much greater amount of money, in a much shorter amount of time.

Happy man retired at 40

How much money do you need?

Well, it depends on what life you want to have after you retire, If you’re fine with living on $1,500 a month until you’re 80 (2019 US life expectancy was 79 yo), you’d need only $720,000 ($1,500/month x 40 years).

The idea is, to take your ideal annual (or monthly x 12) income, i.e. your pension, and multiply this by the length of the retirement. 

While average U.S. Citizen is expected to live just under 80 years, it’s a good idea to assume that you’ll live (hopefully) much longer than that. This makes sure that if you live longer, you don’t run out of gas, and if you die earlier, you have some left for your family.

To show you a relatable example, let’s say you want to live on $45,000 a year, which is $3,750 every month, for 40 years when you retire at 40, you’d need to have saved $1.8 Million by the time you retire.

How much do you need to save every month?

How much do you need to save every month?

Assuming you’re 25 years old, and you’d like to retire at the age of 40, you have 15 years to save $1 million. You’d have to save nearly $7,000 ($6,944.4) every single month. That’s a lot of money. That’s why you need to take all things into consideration before you start saving.

Retiring at 40 requires you to give up on most things you have in your life for the future good. It means extra saving mode.

The average US salary is $56,516 yearly. According to the Bureau of Labor Statistics, as of 2019, the average Housing expenses are $1,674 monthly, transportations, personal insurance (and pensions) are $813 and $608 respectively. Groceries are at around $372/mo, and health care at around $414/mo. This all-together adds up to $3881/month, which is $46,572/year.

This leaves you with $9944 a year to save. This is certainly not enough, so how do you pull this stunt off?

How do you save that much money in a relatively short amount of time?

  1. Run the math

Take your salary into consideration. Obviously, the more you earn the easier it will be to save. On the other hand, if you earn a lot, you might want to keep up your living standards after you retire, so that you will need more than just $2M.

Get a list of all the stuff that eats your cash every month, all the bills, insurances, and stuff. Get all the static expenses in one place, preferably a piece of paper.

Think of any amount you’d need to live normally, like food, gas, clothes, etc. 

Take note of each thing you spend money on during the month. See what things were necessary, and which ones you could’ve gone without. The most important part of saving money is assessing where the money goes, and if it’s a necessary expense.

Try to cut down on anything you don’t need. Switch to public transport instead of a car. Basically try to save on every part of your life you can save on.

  1. Get a savings plan

Figure out how much you need to save every month and stick to it.

Try figuring out if your employer offers a savings plan. Find out if you’re eligible for 401(k) program. This could come in especially handy when dealing with taxes and stuff. Moreover, there might be some slight bonuses. 

Consider opening an IRA. Individual retirement accounts are a great way to help you build your retirement fund.

Money should work for itself. If you stash your cash under the bed, the inflation might eat up a chunk of it by the time you retire. If you’re no investor, put the money into a bank on some kind of investment account. 

This could result in a few percents here and there, and over the course of 15 or so years might build up a huge supplement to your retirement egg.

If you’re bold (or simply know your crafts) maybe try investing into stocks? Any type of a long term investment might help you wit your quest to save for retirement.

  1. Decide on your goal and start saving

The earlier you start saving, the better. If you’re planning to retire at 40, this might be a bumpy ride. You’ll most likely have to put a significant chunk of your salary aside and get used to living on a tight budget. Of course, it’s manageable, but it might be hard if one’s used to living in luxury.

When your initial goal is a bit out of reach you might want to consider lowering your expenses even more (if it’s even possible), or maybe lowering your retirement expectations. Sometimes you’ll need to do both. It all just comes down to whether the prize is better than the sacrifice.

Some people move abroad for retirement, as life in other countries might be cheaper compared to states.

What if all of this is not enough?

If all the methods fail, and you still can’t save enough money for your retirement, getting advice from a professional financial advisor could help. 

Financial advisors are people who specialize in dealing with savings and investments. They can help you get a personalized savings plan if you need it.

More importantly, They can take a closer look at your case and assess whether it’s even possible for you to retire at 40. Or I should say – favorable. You could always retire at 40, but the question is, whether you’d be able to live your life on a tiny budget. 

Conclusion

Retiring at 40 is a promising perspective. Unfortunately, it’s difficult. 40 is a very young age to retire, and while definitely possible, it will very likely require a lot of sacrifice and commitment. 

If however, you think that retiring at 40 is a bit too soon, and requires you to sacrifice too much, why not retiring at 50? This might give you a little bit more time to get things sorted out and save up.