Retiring at 40 is the dream for many. You have spent a good twenty years working to achieve your retirement but still have long life ahead of you and are young enough to enjoy it in a very active way.
Most people would love to retire at 40 but a very small number of people are actually able to retire at 40. In fact, most Americans fail to prepare adequately for retirement at 65. In this article I hope to show you what it's going to take to retire at 40. This is not an impossible challenge for the average person, but then again it's not easy either, and the closer you already are to 40 the more difficult it's going to be.
So, assuming that you have a few years to go until you're 40, I'm going to show you a step by step, scientific process you can follow to retire at 40. Before I do that I want to once again reiterate that it's not going to be easy, but if you're determined then it is most definitely possible. So, without further tiptoeing around the subject, here is the all important equation you need to understand:
Number of years to retirement = 25 (%living expenses / %saved)
At first glance this equation may not make too much sense. Let's spend some time to walk through what it means. First we divide what we need to live off by what we are able to save, expressed as percentages. What this part of the equation is getting at is that we need to maximize out savings and minimize our expenses. Next we multiple that figure by 25. This is based on the assumption that having a 4% drawdown from our capital in retirement will last us in perpetuity. We use 4% as that's the figure most investment professionals use.
It is also easy to alter this equation to suit your needs. For example, if you already have 2 years of living expenses saved, then you would need to multiply by 23 rather than 25. If you had 4 years of living expenses already saved they you would multiply by 21 rather than 25.
Let's look at an example of this equation in action. Let's imagine we get really serious about retiring at 40 and decide to save 50% of our salary and live off the rest, and we are starting with no savings. Here's what the equation looks like:
Number of years to retirement = 25 (.5/.5)
This results in an answer of 25, meaning it's going to take 25 years for us to be able to retire. If you're reading this thinking it's depressing that if you save 50% of your salary it's still going to take you 25 years to retire then... good! This article is designed to get you to take action! So what you've got to do is take extreme action! You've got to search harder for savings and work harder to increase your income â start selling stuff on eBay, writing InfoBarrels for extra income etc.
If the net effect of this was that we could boost our income by 15% and trim our outgoings by 5%, then we would end up with the equation looking like this:
Number of years to retirement = 25(.3/.7)
The result of this equation is that with a little bit of extra effort on your part you can retire early after approximately 10 years of saving (half the time!!), meaning that if you get with this program at 30 or under you can retire at 40. If you're over 30 then obviously you need to get even more extreme. I never said this would be easy. I just wanted to give you that mathematical formula so you could take retiring at 40 into your own hands. The rest is up to you.