How To Retire By 40: Is it Possible?

Thinking of quitting your job and want to learn how to retire by 40?

The dream of not having to work 40 or more hours a week is appealing. It’s not an easy task, though.

Thankfully, there are numerous modern-day examples of how to have enough money to accomplish early retirement.

In this post, we’ll go over common steps people take to retire early:

  1. High Savings Rate.
  2. Controlling Expenses
  3. Invest Money In The Stock Market
  4. Side Hustle And Earn More Income

Let’s examine exactly the ways in which you can retire by age 40.

How To Retire By 40

What Is The FIRE Movement?

There is an online, international community of people who are all part of the FIRE movement. Before the age of 65 or 60, the whole concept of retiring early was popularized by the FIRE movement.

The FIRE movement (Financial Independence Retire Early) is a community of people who want to retire early, just like you. They are made up of bloggers, digital nomads, YouTubers, stock market investors, and more.

All of them have earned enough money or are on their way to earning enough money to retiring early, based on their individual goals and circumstances.

Most examples of people who have retired early come from or subscribe to the FIRE movement in one form or another.

There are subsections of the FIRE movement, such as LeanFIRE, CoastFIRE, and FatFIRE, but for the sake of simplicity, we will look at just FIRE only.

Common Hallmarks Of The FIRE Community and How To Retire By 40

1. High savings rate

Requires: The ability to delay gratification, long-term planning, and mindset, analyzing one’s expenses.
How To Start: Total up and analyze income and expenses in Excel, Mint or another budgeting tool.

People who want to retire by 40 aim for very high savings rates, upwards of 70% or even higher. Why? In short, the higher your savings rate, the faster you can retire early.

Your savings rate is the amount of your income you save divided by your total income.

If your savings rate is 10% every month or year, you probably won’t be able to retire early. But, if you can save 50%, you can likely retire in 17-20 years.

This is a stark difference, decades of your life potentially, all hinging on that one rate. Note that this rate assumes your current expenses will remain consistent for the remainder of your life, so having a realistic calculation of your income and expenses is important when doing this.

Typically, people following the FIRE movement aim for at least 30% or 50% for their savings rates. The higher, the better.

2. Controlling Expenses

Requires: Brainstorming, price comparisons, exploring alternatives, discerning needs from wants.
How To Start: Examine individual expenses and businesses you buy from to determine if you can spend less for that expense category or spend less with that business.

Tying back to the last point, if you desire to achieve a high savings rate so you can retire faster, minimizing expenses is key.

This typically involves meticulously tracking expenses each month. People in the FIRE movement frequently live with roommates, forego fancy restaurant dinners, and even avoid using cars to radically reduce their expenses.

Again, the lower the expenses, and the higher the savings rate, the faster you can retire. Live with your boyfriend or girlfriend, drive an older car, cut down on grocery spending, negotiate rent, downsize to a smaller living space, and more are on the table for expense reduction.

Read this article to learn different tips on how to save money.

3. Invest Money In The Stock Market

Requires: A brokerage account, basic knowledge of stocks or ETFs, cash to invest in the stock market.
How To Start: Lookup index funds, ETFs, or stocks that you want to purchase and hold.

Great – now that you have worked on your savings rate, you are hopefully sitting on extra money. Instead of letting it sit in your bank account, the vast majority of FIRE followers put the money into the stock market or other investments like real estate, typically in an index fund or a broadly diversified ETF.

The most popular index funds and most recommended ones in the FIRE movement community usually revolve around Vanguard index funds.

Some FIRE followers prefer to invest in stocks that provide high dividends instead. Investing in index funds or dividend-producing stocks are both fine.

This step is critical for many FIRE followers. Nearly all, if not all, of them, invest in the stock market. This is how they can fund their expenses during their retirement, and maybe hopefully, even grow their net worth via stock market gains over time via compound interest.

In other words, instead of collecting a paycheck each week from a job, in early retirement, you would sell off a portion of your stock investments to cover your expenses. The bulk of your portfolio would continue to rise over time and compound by reinvesting gains from year to year.

Investing via tax-advantaged retirement accounts can be even more advantageous than just investing post-tax income in an individual brokerage account.

However, many retirement accounts penalize any withdrawals taken before the standard retirement age in the 60s. For cash needs between 40 and 60, be sure to have those invested in non-restricted accounts, like a normal individual brokerage account.

You may be wondering: Why index funds?

In short, index funds are useful because they are simple to understand, inherently diversified, have low fees, and require less maintenance than other methods of stock investing. Even Warren Buffett, one of the most famous stock investors of all time, advises that most people just invest in index funds.

Still unsure? Well, let’s say you decide not to invest in index funds and pick stocks yourself, whether regular stocks or high dividend-yielding stocks. You would need to know which stock you want to buy, among hundreds.

Ideally, you would also do your research to determine with confidence that you think your chosen stock will go up in the coming years.

If you choose incorrectly, you can easily lose money on your one stock pick. However, in an index fund, the fund invests in numerous companies.

This lowers risk because if one company, in particular, is doing poorly, the other companies in the fund’s portfolio are hopefully doing better and make less of a dent in the fund’s performance.

So maybe if you are a stock market whiz, you can pick your stocks for your early retirement goal. For most people, index funds are simply easier to invest in since they take all the guesswork out of stock investing.

How To Buy ETFs In Canada

My favourite and cheapest ways to buy ETFs in Canada are:

ImageProduct TitleFeaturesPrice
Editor's Choice
Wealthsimple Trade
Wealthsimple Trade
  • ETF buys and sells have $0 trading fees
  • Desktop and mobile trading
  • Reputable Brand
  • Beautiful Design
Get $50 Signup Bonus
Reliable Pick
Questrade
Questrade
  • ETF buys have $0 trading fees
  • Desktop and mobile trading
  • Most types of accounts available
Get $50 Free Stock Trades

To learn more, check out my full breakdown of the best trading platforms in Canada here.

4. Side Hustle And Earn More Income

Requires: Personal drive, working when others aren’t, knowing one’s skills, marketing your skills and your services.
How To Start: Freelancing online and other side hustles ideas.

Earning more income always helps. It tilts the savings rate more and more in your favour. In retirement, extra income can also give a nice boost and a sense of added security.

Since we have already covered expenses and investing, income is something to consider because it can offset expenses and go towards increased stock market investing.

FIRE followers participate in numerous side hustles, both before and after retirement. They include blogging, affiliate marketing, running a YouTube channel, renting out a spare room, driving for Uber, and much more.

Adding side hustle income to your life can improve your savings rate and help replace some of the job income during retirement. It’s a key tactic to many people who retire in their 40’s or 50’s.

How Much Do I Need To Retire By 40?

The exact amount of money you need to retire by 40 depends on your specific circumstances.

The first thing you will want to do is to estimate your anticipated annual retirement expenses for yourself, your spouse, your kids, and/or your family.

Think about how much travelling you want to do, where you want to live, how many kids you wish to have, and the cost of living of your home. Consider your lifestyle in retirement, factoring in for expected health care costs as well.

Once you get a solid estimate of your expected annual expenses in retirement, you can determine how much you need to retire based on a safe withdrawal rate.

4% Rule

Many early retirees use a 4% withdrawal rate, based on the well-known Trinity Study.

The study essentially concluded that during 30 years, one could withdraw up to 4% from their stock portfolio each year safely.

Let’s say your annual expenses are $40,000. If you assume the 4% Trinity Study safe withdrawal rate, divide your annual expenses by the safe withdrawal rate. $40,000 divided by 0.04 equals $1,000,000. In other words, 25 times the annual expenses of $40,000 equals $1,000,000.

What this means is once you have $1,000,000 properly invested in the stock market, you can retire early and live off your stock portfolio.

There has been some debate on the Trinity Study recently, though. Some experts calculated that given economic changes and changing bond rates, the new safe withdrawal rate is 5%. This rate assumes you want some money to remain after your retirement.

The blog’s new proposed rate is calculated based on the current 10-year bond yield. The bond yield was a basis for the 4% rule, and the yield has changed from the study’s release in 1998 compared to today.

Using a more fluid analysis, the blog recommends retiring based on income, not expenses. A safe net worth goal based on income would be 20 times annual gross income. This would be roughly sufficient to cover retirement expenses, but not anything beyond retirement.

How Much Do 40-Year-Olds Have Saved For Retirement?

According to CNBC, the average retirement account balance for 401ks in America for those aged 40 to 49 is $120,800 in Q4 2020. It is noted that by 40, one should have three times their salary saved up.

According to The Balance, the average savings for those aged 44 to 49 is $113,370 in 2020.

Can I Retire Early With One Million Dollars?

Retiring early is highly dependent on individual circumstances, as previously stated. For instance, retiring in Luxembourg isn’t the same as retiring in Vietnam due to cost of living differences. One in three Americans believes that they need at least $1 million for a comfortable retirement.

If your annual expenses are $40,000 or under, under the 4% rule, you can retire early. For a single person without kids, this may be a realistic scenario. For married couples, individuals with kids, or those living in high cost of living areas, your annual expenses in total are likely above $40,000.

If you want to consider retiring with just one million dollars, consider the following: where you live, how long you expect to live, your lifestyle, health care costs, retirement income, investment risk, and future economic inflation.

Realistically, if you are 40 with $1 million, you will have to strongly consider living in a lower cost of living country, like in Southeast Asia, for example.

If you can somehow manage a retirement scenario with one million dollars where you can have solid passive income and grow your net worth each year, it may be possible.

Conclusion: Retire Early By 40 With Financial Independence

If you want to retire early, pay close attention to those core principles of the FIRE movement. Focus on lowering expenses, increasing income pre and post-retirement, and investing in the stock market—perhaps with Vanguard index funds.

There are many examples of people who have retired early on online blogs, YouTube, and more. FIRE is a mindset and a strategy. Luckily, other people have done it before you. Take a look at some FIRE blogs for inspiration and as templates for your plan.

Now is the time to make your early retirement plan and take action to retire early.

Photo of author
Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

Check Out These Posts:

Leave a Comment