Have you heard the one about the 30-something professional who, tired of the rat race, quits her job to travel the country in an Airstream trailer? (What! How?)
These days, it feels as though the internet is filled with fantastical stories of modern young professionals eschewing traditional desk jobs for a more laid-back lifestyle and the freedom to pursue one’s passions. But just how financially sound is this choice? And is “retiring” at such a young age a goal that’s attainable for anyone?
Can YOU Retire by Age 40?
The FIRE movement is something that has received a fair amount of coverage in recent years. Not fire in the burning sense, but FIRE: Financial Independence Retire Early.
Sounds great, but retire by age 40? It’s a thought that many of us would laugh and shake our heads at. After all, how am I supposed to even think of retiring when I have children in diapers/daycare/school/sports (take your pick!), a mortgage, and just regular bills like groceries and utilities.
So how do others do it? What are they doing different than most Americans who find themselves simply trying to save enough to retire at age 65? We’ll ignore those who received a large financial windfall (something that often gets left out of these stories) and instead focus on those with normal financial situations and what they have in common.
- High Savings Rate. It should go without saying, but if you intend to retire by age 40, you’re going to need to save A LOT. To give you an example, if you would like to have an annual income of $40,000 to retire on at age 40, you should have around $1,000,000 in savings built up. If you would be fortunate enough to get a return of 8%/year, you would need to save at least $3000/month from age 25 to age 40 to build a large enough nest egg to retire on. That means maxing out your 401k ($19,000/year) if you have access to one through your job and your IRA ($6000/year). I would suggest using a Roth option whenever possible in both scenarios. Once your retirement accounts have been maxed out, the remaining dollar amount could be invested in a brokerage account.
- Low Spending Rate. If you intend to save a large portion of your income, you will need to be extremely vigilant about keeping your expenses to a minimum. This means all debts should be paid off and any expense that can be eliminated from the budget is going to get the axe. Good-bye cable, phone data plan, movies, eating out, gym membership…you get the idea. Frugality is a lifestyle trait that is commonly embraced by the FIRE community. Not only will your expenses need to be low while trying to save as much as possible, but they will also need to remain manageable and flexible while you’re retired to avoid having your savings run out early when we have drops in the stock market.
- More Income. Asking for a raise, a second job (or three), finding a better paying job are all ways to consider increasing one’s income while trying to save for retirement. Of course, if you do have the ability to walk away from the workforce at age 40, you always have the option of reentering the workforce on your own terms to supplement your income. And that ultimately is the attraction of the FIRE movement, the financial freedom to live life on your own terms.
So where to begin if you’d like help? The calculators on our homepage at Frontier Bank are a great place to start. The next step would be to make a call to a fee-only fiduciary financial advisor, like Frontier Bank Wealth Management & Trust. We would be happy to assist you in developing a customized retirement plan whether you want to retire at 40 or 80.