How Much Do You Need to Retire in Your 40s?

 In Personal Finance

how much do you need to retire

Early retirement – it seems like an unattainable dream, doesn’t it? For most people, the reality is working until you’re 65 at the least, and possibly beyond that point.

However, early retirementcan happen. You just need to know the answer to how much you need to save to retire at a given age. It’s even possible to retire in your 40s, giving you even more time to actually live your life, rather than working it away for an employer.

Of course, it’s not quite as simple as that. In addition to learning how much you’ll need to save to retire, you also need to know a few other things, and you’ll need to dispel a couple of myths.

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How Much Do You Need to Retire: The Lie of the 4% Rule

If you’ve spent any time at all planning for retirement, then you’ve at least heard of the 4% rule. Basically, this rule says that a family that spends just 4% of its retirement savings per year will have enough money to last through their entire retirement.

For example, if you had $1 million saved up for retirement, you would be able to spend $40,000 per year and never have to worry that you’d run out. Does that hold true for those who retire early, though?

No, it doesn’t. Moreover, it might not hold true for those who retire at the conventional age, either. There are many factors that will affect this, from longer lifespans enjoyed by today’s population, to increasing inflation to the potential for a financial emergency to arise.

Given that, is it actually even possible to retire at 40? Yes, it is. The trick is to get away from the 4% rule and learn to live by something else.

It will result in less money to live on, but ultimately, it allows you to retire earlier and enjoy better peace of mind about the security of your wealth and its ability to last for the rest of your life.

The New Investment Rule to Retire by 40

So, what’s the new rule you need to live by? Simply put, it cuts the old rule in half.

In order to determine how much you will have per year to spend, you need to divide your age (or that of your spouse if he/she is younger than you) by 20.

This gives you the percentage of your savings that you can spend each year and still have money to last through retirement. If you’re 40, that would be 2%.

A 40-year old with a million dollars in savings would be able to spend $20,000 per year. That doesn’t sound like much, does it?

However, it does work, and there are ways to offset the reduced annual spending cash.

Joe Udo

We’ll use the example of Joe Udo here. He actually managed to do exactly what you’re contemplating – retiring early, at age 38.

Joe worked as a computer engineer. His wife worked in human resources. The couple ran a two-year test to see how they could live on just one income and tracked their expenses.

The result? Joe was able to retire from his job (his wife still works, but is planning to retire by 2020). Today, they own a couple of income-producing rental properties, as well as $1.4 million in savings.

Combined, the entire family is able to live on just $50,000 per year, which includes Joe’s wife’s income, as well as the returns from their investments and rental income.

Not only do they manage to survive on this, but they can actually continue to save money and to save for their son’s education.

early retirement

Other Steps

In addition to applying the new rule and learning how much do you need to retire, you need to make additional changes. These are broad ranging, but definitely doable.


One of the first things you’ll need to do is pay off debt. That includes student loans, auto loans, and credit cards. Student loan debt alone can be crushing, forcing you to work decades longer than you would otherwise have to, so take care of it early.

Cut Expenses

If you want to follow Joe Udo’s example and retire at 40, you’re going to need to make some sacrifices. These aren’t large things, but they will affect your lifestyle.

For instance, rather than paying $5 per cup of coffee at that big chain, make it at home for pennies per cup. Rather than eating out for lunch every day, brown bag it. Let dining out for dinner become a special treat every now and then, rather than the norm.

Don’t Count on Social Security

If there is one flaw with Joe Udo’s overall plan, it’s that he counts on earning Social Security once he hits age 65. While that’s fine in theory, understand that Social Security may not be around, or if it is, it might pay out much less than the small amount it does now.

While you should factor Social Security earnings into your retirement planning, it’s best not to count on it and to have alternate solutions in play long before you reach the age where disbursements begin.

Build a Bond Ladder

Investing is a crucial component of retiring at any age, much less early. And, while you can (and should) put some of your money into stocks, bond investments are actually better.

With high-quality corporate bonds, you can create a bond ladder that offers a predictable stream of income, as well as guaranteed capital repayment on the maturity date.

By investing in a series of bonds with different maturity dates, you guarantee yourself a predictable, reliable stream of income for a very long time. Once all the bonds in the ladder have matured, you can rinse and repeat.

Save 20% of Your Income

As a final note, make sure that you’re able to save 20% of your annual income. Anything less will not allow you to retire early. In fact, it might make retirement at 65 difficult, pushing that date off by several years.
saving for retirement

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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