Many of you may have thought about early retirement. Why not consider it? Working life can take up a lot of time, and it’s normal to imagine what it would be like to retire with plenty of time to enjoy the fruits of your labor.
Early retirement is becoming an increasingly popular choice for many professionals, and retiring in your 40s is possible. You will, however, need to think it through very carefully. Let’s look at some ways to make this dream a reality.
Get Specific About Early Retirement
Everyone has a different definition of retirement. A relatively average life expectancy suggests that if you plan to retire at 40, you’ll need to consider what you’ll do for the following four decades.
Do you want to travel more once you retire? How much will you travel and for how long? When it comes to spending habits, how will they change day-to-day? Will there be an increase or decrease in your expenses? Is part-time work still an option for you? Would you like to start your own business? Would you like to volunteer or start a nonprofit organization?
The first step is to consider these questions because your answers will determine how much money you’ll need to do the things you want to do – and how to ensure you’ll achieve that monetary goal.
Establish Your Savings Goal
Setting a savings goal under normal circumstances is difficult enough, but it’s even more challenging when you plan to retire early.
A good rule of thumb for determining a retirement savings target is to multiply your intended retirement income by 25. For example, if you plan to spend $50,000 a year for 25 years, you’ll need $1.25 million. Of course, this number assumes you plan to retire at the usual retirement age. The earlier you plan to retire, the more money you’ll need to have saved.
You may want to consult a financial planner to help you determine exactly how much you should aim to save. Once you’ve crunched the numbers, you’ll know what you need to save for early retirement.
Calculate the Growth of Your Savings
After deciding your long-term goal, figure out how much money you have already saved and how long it will take you to reach your retirement savings goal. Use this as a guideline to estimate how much you’ll need to save every year in order to retire when you’d like.
Let’s say you are 25 years old with an after-tax income of $50,000 annually, and you have just begun your savings journey with $1,000 in the bank. If you can be extremely disciplined, commit to saving 60% of your monthly income (roughly $2,500), and are able to earn an average investment return of 5% between your different savings accounts, you could save $994,631.92 by the time you are 45 years old.
With the average life expectancy at roughly 78 years, that would allow you to withdraw $5,000 each month (or almost $60,000 annually) until you were 80 if you continued to earn an annual investment return of 5%. But remember, this does not include unforeseen expenses or costly health issues that might arise – or additional withdrawals if you live beyond 80 years. It also assumes that you can keep your expenses low enough prior to retirement so that you can save more than half of your income. That is a tall order.
Saving More and Earning More
If you plan to live comfortably in retirement and not stretch yourself too thin before you retire, you’ll probably need to consider different options. Yes, you may be able to spend as little as possible to accommodate your aggressive savings goals. You could reduce expenses by sharing your living space with roommates, opting for public transportation instead of owning a car, or eliminating other unnecessary expenses. This can be extremely difficult for many to do.
Another option is to Increase your income and invest the extra money. Adding to your cash flow could be as simple as increasing your work hours, taking on a part-time job, or starting a side hustle. You can retire in your 40s if you are proactive and good at deferring gratification. Make sure you save and earn as much as possible, and keep your eyes on the prize! Remember that getting started early will increase the likelihood you’ll be capable of early retirement and have enough money to enjoy it.