How Rich Do You Have To Be To Retire by 40?
Written by
James Holbach
Edited by
Molly Sullivan
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Everyone looks forward to one day retiring and dropping out of the daily grind. Most will have to wait until their 60s to do it, which can seem a million miles away if you’re still in the middle of your working years.
You may not have to wait, though. You could join the Financial Independence, Retire Early (FIRE) community and potentially make it happen years or even decades earlier. It won’t be easy though, and you’ll need to have some serious money saved.
GOBankingRates spoke to Taylor Kovar, certified financial planner (CFP) and the founder and CEO of Kovar Wealth Management, to find out just how rich you have to be to retire by the time you’re 40 years old.
How Much Money You’ll Need
“A common rule of thumb is to have at least 25 times your annual expenses saved. This is based on the 4% withdrawal rate, which is considered a safe rate to avoid depleting your retirement savings too quickly. For example, if your annual expenses are $50,000, you would need $1.25 million saved,” Kovar said.
There are many retirees who have had far less than that when they retired, but those people also retired at a conventional age. Most retirees rely at least partially on Social Security benefits to fund their retirement, and the earliest they can start receiving those is at age 62, and that’s at a reduced rate. To get their full Social Security payment, most people will have to wait until they’re 67 years old. Similarly, in most cases, you can’t withdraw from any 401(k) accounts and IRAs until you’re almost 60 — at least, not without a penalty.
Obviously, if you hope to retire decades earlier than that, you’ll need enough savings to fund more than 25 years, and for many of those years you won’t have Social Security payments to help you out, so you’ll need enough money to fully support yourself.
“Retiring at 40 could mean a retirement period of 45 years or more, depending on life expectancy. This might require a more conservative withdrawal rate, such as 3.5% or even 3%, to ensure your savings last. This adjustment means you may need to save even more than the 25x rule suggests,” Kovar said.
Research backs this up. A Vanguard study that examined the 4% rule for early retirees found that the rule has about an 82% likelihood of fully funding a 30-year retirement. That probability drops to 54% for a 40-year retirement, and falls all the way down to 36% for a 50-year retirement.
Estimating Your Annual Expenses
There are several factors you’ll need to consider when figuring out what annual expense you should be planning to save for. Your current expenses are a decent starting point, but there are a lot of adjustments to make. For example, if you have a mortgage, at some point that will be paid off. If you have kids, you hopefully won’t be supporting them financially 20 years from now. These expenses and more have a fairly predictable end date that you can adjust for in your planning.
Some things are less predictable, like the rate of inflation, but they must be accounted for in your financial plan.
“The value of money decreases over time due to inflation, so it’s crucial to plan for higher future expenses. This means your savings target should be adjusted upwards to maintain purchasing power,” Kovar said.
He also noted that healthcare costs need to be factored in — you won’t be eligible for Medicare until the age of 65. Hopefully you’ll be in good health for most or all of your early retirement years, but you’ll need to be prepared for any unpleasant surprises.
You’ll also need to think about your desired lifestyle, as that will have a huge impact on your expenses. If you live in a high-cost area or want to travel regularly during retirement, that will dramatically increase the amount of money you’ll need. It will be critical to take a hard look to determine how feasible that will be for you.
Talk To a Professional
Retirement planning is complicated enough as it is, even for those retiring at a conventional age. Doing it early makes it even more nuanced. It’s a great idea to get the help of a professional financial planner or retirement advisor. They can assist you with every part of your early retirement plan, from estimating expenses to the best investment vehicles for your savings. The better your plan, the better your chances of successfully funding an early retirement.
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