It’s never too soon to start planning and saving for retirement. If you plan to retire at what Social Security calls your "normal" retirement age—66 or 67 for most people—you could have several decades to save. But if you want to retire at 40, you're going to have to save far more aggressively. That doesn’t mean you can’t do it. Here are some ideas.
- It's possible to retire by 40, but it takes a lot of planning (and aggressive saving) to do it.
- Start by running the numbers to find out how much money you'd need to save each month to retire early—and then decide if that’s feasible.
- If your savings target seems out of reach, look for ways to spend less and earn more now, or adjust your expectations for retirement (or both).
Envision Your Ideal Retirement
Retirement means something different to just about everyone. If you plan to retire by 40, you need to think about how you’re going to spend the next four decades or so after that, assuming you have a relatively normal life expectancy.
Do you plan to travel part of the year, for example, or become a full-time nomad? How will your day-to-day spending habits change? Will any of your expenses go up or down? Will you still work part time? Do you have plans to launch a business? Do you want to volunteer or start your own nonprofit?
When you’ve thought it through and come up with a ballpark budget for how much money you expect to spend in retirement, you can dig into the other side of the equation—how much you'll need to save to make it happen.
The 2019 Retirement Confidence Survey from the Employee Benefit Research Institute found that one in three Americans think they’ll need at least $1 million to enjoy a comfortable retirement. Unfortunately, the average retirement savings across all Americans was $89,300 in 2023.
Set a Savings Goal
Nailing down a savings goal is difficult enough under normal circumstances. But it’s considerably more so if you want to retire early. One rule of thumb recommends multiplying your desired annual income in retirement by 25 to come up with a savings goal. So, if you want to have $50,000 a year for 25 years, you’d need $1.25 million. But that assumes you retire at a relatively conventional age. If you’re looking at an extra 20 years in retirement, you’d need more like $2.25 million instead.
Of course, you may be able to set the numbers a little lower if you’ll have money coming in from a side hustle or a business in retirement. Also, take a second look at your budget to see if you can get by with less income each year (that’s one reason some people retire abroad). And be sure you factor in Social Security payments for when you reach your 60s. You'll need to have paid into the system for at least 40 quarters, or 10 years, to qualify.
Estimate Your Savings Growth
When you have an idea of what your long-term goal is, look at how much you already have saved and how long you have until you turn 40. This gives you a framework for how much you'll need to save each year and each month to get there.
Let’s say you’re 25 years old, you're making $50,000 a year, you’re just beginning to save, and you want to accumulate $1 million. If you save half of your income each month ($2,083), you could have about $660,000 when you retire at 40. That could translate into about $1,222 a month in income over 45 years of retirement.
Keep in mind that this is an overly simplified example. It assumes a 7% annualized return for the 15 years before you retire, and then equal monthly withdrawals for the next 45 years.
That $1,222 a month could be hard to live off of unless you’re willing to cut back on your lifestyle significantly. Of course, when you hit age 62, you may be eligible to start collecting Social Security benefits. (But bear in mind that they'll be substantially—and permanently—lower at age 62 than if you wait until later in your 60s, up to age 70, when benefits top out.) And if you have that side hustle or business in retirement, that income will help, too.
Consider Ways to Save More
Retiring on $1,222 a month might work if you have other sources of income. But you’ll probably need to aim higher if you want to have enough money to live on when you retire. If you need to save more, you’ve got two basic options:
- Trim your expenses as much as possible. Getting a roommate or two, selling your car and using public transportation instead, or canceling your cable TV can reduce your outflow.
- Work on increasing your income and investing the extra money. You could increase your hours at work or take on a part-time job to add to your cash flow.
Max out your 401(k) if you can, and if you have any money left over, consider a Roth IRA.
Choose the Right Savings Vehicles
If you’re saving on a shorter time frame, you need to be especially strategic about where you put your money. Your employer’s retirement plan, such as a 401(k), is an obvious choice, especially if your company gives you a matching contribution.
Let’s say you make $50,000 a year and start saving at age 25. If you manage to put $23,000 of your income—the 2024 maximum ($22,500 for 2023)—into your 401(k), and your employer matches 50% of the first 6% of your contributions, by age 40, you’ll have over $600,000, assuming a 7% annual rate of return. However, this money will have to wait until later in your retirement as you cannot withdraw it until age 59?, or you will face penalties from the IRS. However, it will grow even more during the nearly 20 extra years.
If saving that much of your income seems impossibly onerous, note that this calculation doesn't account for any raises you might receive between ages 25 and 40; if your salary does rise, a $23,000 contribution will be less of a burden.
The more than $600,000 is still a long way from the $1 million goal (and bear in mind that you'll owe income tax on your withdrawals from a traditional 401(k) account). But if you have any spare income left, you could make up some of the difference by contributing to a Roth IRA.
Using the 2024 annual contribution limit of $7,000 for anyone under 50 ($6,500 in 2023), you could add more than $175,000 to your retirement nest egg, assuming a 7% annual return. In the case of a Roth IRA, your withdrawals will generally be tax-free if you're over age 59?.
Finally, you will have to save some of your money in regular, taxable, non-retirement accounts if you wish to retire at 40. This is because retierment accounts such as 401(k)s and IRAs, both Roth and traditional, require you to be at least age 59? in order to begin making withdrawals. Otherwise you will face significant tax penalties.
The Bottom Line
It is possible to retire at 40, but you have to be proactive—and really good at deferred gratification. So run the numbers and take advantage of every opportunity to save (and earn). The sooner you start planning, the better your odds of retiring early with the money you'll need to enjoy it.