The FIRE movement (financial independence, retire early) inspired a generation of young savers to spend as little as possible, earn the maximum income and save money with an almost religious fervor. They all used different tactics and strategies, but each pursued the same goal — to retire with enough money to be comfortable while they’re still young enough to enjoy it.
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The most ambitious among them are pursuing retirement not at an early 60 or even 50, but before their 40th birthday. Retiring while you’re still in your 30s — decades before you become eligible for Social Security or Medicare — is a lofty goal that will remain out of reach for most.
But it is possible.
After speaking to a wide range of financial experts, GOBankingRates identified 40 steps to retiring by 40 spread out across 10 different categories.
Do you think you have what it takes to save enough to retire before you enter your fifth decade of life? Here’s what you’ll have to do along the way.
Identify Your Savings Target and Timeline
To retire early, you’ll have to hammer out the exact percentage of your income you’ll save each month based on the amount you’ll need to take with you into retirement.
“You have to know your numbers,” said Trip Of A Lifestyle founder Lauren Keys, who retired at 29 with her husband. “Retirement doesn’t magically happen once you reach a certain age — it’s about reaching a specific dollar amount.”
According to Keys, you should:
- Aim to save 25 times your annual expenses — invested in a mix of stock and bond market index funds — by the time you retire.
- Save and invest half of your income (presuming a real return of 6%) to retire in just under 16 years.
- Save and invest 65% to retire in 10 years.
- Save and invest 80% to retire in five to six years.
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Refine the 4% Rule To Match Your Game Plan
The standard 4% rule is one of the most popular boilerplate blueprints for identifying your target dollar figure. You’ll need to adjust it to match your accelerated timeline.
“When you retire young, you need your nest egg to last indefinitely, rather than the 30 years that the 4% rule is based on,” said real estate investor Brian Davis of Spark Rental. He recommends:
- Lowering your withdrawal rate in retirement from 4% to 3.5%. Davis cited data from financial planner Michael Kitces that shows how a 3.5% withdrawal rate can leave your nest egg intact indefinitely.
- Aim to save up 28.6 times your annual spending for a retirement fund instead of the standard 25%, “at least for your paper assets like stocks and bonds,” Davis said.
- Charles Schwab recommends working with a retirement planner to adjust the 4% rule based on your portfolio’s risk level.
- In lieu of working with a professional, Schwab recommends using the Actuaries Longevity Illustrator retirement tool to adjust the 4% rule to your unique timeline.
Steel Yourself for a Spartan Lifestyle
If you’re serious about retiring at 40, your youth is almost certain to be filled with material deprivation.
“You may not be able to enjoy your 20s and 30s like your peers as you aggressively save money,” said Sharon Sanders, co-founder and CFO of Philadelphia Weekly. “But fret not. By retiring early, you will be able to enjoy these things later.”
She offers the following pieces of advice as you settle into your bare-bones lifestyle:
- “If you can, do not move out of your parent’s house so you can save on utility bills, rent, and other basic expenses.”
- “Minimize going out and on vacations, as these things can drain your savings.”
- “Skip expensive brunches and unnecessary purchases in order to stay on track with your financial goals,” said accredited financial counselor Sara DeSantis of AFCPE.org, who is set to retire by age 32. It’s not just brunch — several experts who spoke with GOBankingRates cited eating out generally as a no-no for anyone on a drastic saving plan.
- Forgo cable packages, pricey data plans, streaming services, paid apps and all but the most necessary subscriptions, all of which the experts agreed are essentially off-limits.
Be Vigilant in Shunning FOMO and Lifestyle Creep
DeSantis offers the following two tips on grappling with the temptation to spend, which is sure to haunt your days:
- “Become a super saver and don’t let FOMO (fear of missing out) get the best of you.”
- “Start small. A complete lifestyle overhaul can be tough to stick with. Instead, plan out a series of small changes over a predetermined amount of time that align with your financial and lifestyle goals.”
FOMO can nudge even the most diligent saver into overspending, but lifestyle creep is just as dangerous, according to Chris Muller, vice president of brand at Money Under 30.
“Your lifestyle should not be based on your income,” Muller said before offering these two tips:
- Don’t increase your spending as your income grows over the course of your career.
- Dedicate any bonuses or raises to your retirement savings and forget you ever got them.
Slim Down Your Housing and Transportation Costs
Keye, who retired before she turned 30, found the best opportunities to save in two key areas of her budget: housing and transportation. She offered the following pieces of advice for these crucial categories:
- “Living with roommates can allow you to split rental costs or to collect rent if you own your home.”
- “Driving older cars paid in cash can give you room in your budget to save more for retirement.”
- “Choosing a job that’s close to home, or vice-versa, can reduce your dependence on cars and gasoline.”
- “Eliminating a $400 monthly car payment and investing that money into an S&P 500 index fund is likely to compound to almost a million dollars over 30 years.”
Save, Save, Save
If you want to retire early, fanatical saving is the name of the game.
“Many Americans aren’t saving enough for retirement because they don’t appreciate just how much they’ll actually need,” said Lauren Anastasio, director of financial advice at Stash. “Pensions and Social Security alone helped generations before us live comfortably in retirement, but pensions are rare to come by for those who are still in the workforce and Social Security likely will not be sufficient to cover livable wages.”
Here are some tips from Anastasio and other experts:
- Start early — save a portion of every check and never wait for a hypothetical future milestone like a job that pays more or a time when life is less expensive.
- Automate your savings.
- Treat saving like a bill and pay yourself first.
- Save consistently and steadily on a routine schedule.
Take Advantage of Tax-Favored Accounts
It’s not just how you save or even how much — your choice of account type will have a big say in how soon you can retire. Here’s what the experts said:
- Squeeze every dollar out of your 401(k) by contributing at least enough to meet the company match — never leave your boss’ money on the table.
- If your employer doesn’t offer a retirement plan, open an IRA to shelter pretax income.
- Open and max out a Roth IRA to protect and grow after-tax income.
- Consider an HSA — health savings accounts are excellent supplementary savings vehicles because you can bring any amount you don’t into retirement with you.
Develop Multiple Income Streams
One way to save more is to spend less. The other way is to earn more money — and unless your boss is willing to renegotiate your salary, that means launching a side gig.
“Explore a side hustle and monetize your skills,” DeSantis said. “Spending extra time working now can help you spend less time working in the future — hello, early retirement.”
The best side gigs are the ones that produce passive income without requiring you to labor for a wage. According to Time, these are some of the best ways to open a passive income stream in 2022:
- Rent your car through a site like Turo.
- Invest in real estate through a platform like Concreit.
- Monetize a property — or even just a room — through Airbnb.
- Use apps like Neighbor to lease storage space in your attic, garage or basement.
Eliminate and Avoid Debt
The enemy of saving is debt — and if you’re seriously considering a pre-40 retirement, you simply can’t be saddled with interest payments.
“Debts can weigh you down both financially and emotionally,” said Luke Lee, founder and designer of Ever Wallpaper. “By paying them off as quickly as possible, you’ll be in a better position to focus on building up your retirement savings.”
Follow these guidelines:
- Use credit cards wisely — pay your statement balance in full every month to avoid finance charges while still collecting points, miles, cash back and other rewards.
- Use the snowball method of debt repayment to tackle your smallest debt first, then move on to the next-smallest debt, and so on.
- Use the avalanche method to conquer the debt with the highest interest rate first, then the next highest, and so on.
- Consolidate your debts into one account with a lower interest rate through a personal loan, a home equity loan or a balance transfer credit card.
Build and Maintain Your Credit
On your journey toward early retirement, anything but pristine credit will cost you more, stretch out your timeline and make saving harder every step of the way. Keep your credit in tip-top shape by:
- Paying every bill on time, every time, every pay period
- Keeping your credit utilization ratio under 30%
- Avoiding legal judgments, defaults, bankruptcies and other blemishes
- Refusing to co-sign loans for friends and family members
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