How to Retire at 40, According to Experts

Working life can be stressful, especially if your job does not reflect your passions. This is why more and more young people are planning to retire at 40, to enjoy the rest of their lives free of work obligations.

It sounds appealing, but it takes discipline and sacrifice—and much will depend on the kind of lifestyle you are willing to have during your twenties and thirties. Are you ready to sacrifice takeouts and shopping sprees?

There's a movement dedicated to this—the Financial Independence Retire Early formula, or FIRE—which advocates extreme saving and aggressive investment to allow you to retire decades earlier than a traditional retirement plan would. So, is it realistically possible to retire early?

Is It Possible to Retire at 40?

Finance experts believe it is possible to retire by the age of 40 but, depending on your earnings, it requires toughness and an exceptionally frugal lifestyle.

Helen Morrissey, senior pensions and retirement analyst at U.K. firm Hargreaves Lansdown, believes retiring this early is likely to mean "considerable financial sacrifices both during your working life and in retirement" and it will be extremely difficult for anyone but the most wealthy.

"There's a good chance you could live into your eighties, or even longer," she told Newsweek. "So you need to think about how 20 or so years of saving and investing is going to give you enough to live on for 40-plus years. You need to think about what kind of lifestyle you want in retirement and how much that is likely to cost."

Morrissey added that in order to retire by 40 you will need to make significantly higher contributions to your pension plan while you can, as you will only be working for a relatively short period and regular contributions probably won't cover it.

Kelly Lannan, senior vice president, emerging customers at Fidelity Investments, based in Boston, believes it all depends on the individual.

"These days, how a 40-year-old defines retirement may look very different than generations before, as many people may continue working in non-traditional office settings while still seeking the independence they desire."

street sign work or retire?
Early retirement is likely to mean considerable financial sacrifices both during your working life and in retirement. Getty Images

How to Retire at 40

According to Nilay Gandhi, a certified financial planner and senior financial adviser at Vanguard Personal Advisor Services, retiring early requires extremely thoughtful planning—and the first step is to understand what kind of life you want.

"Envision what retirement will look like across different decades. For example, will you plan to travel more in your forties and fifties, with plans to slow down and volunteer for meaningful causes later in life?

"Having an understanding of what you are trying to achieve in early retirement can give a better sense of what you will need to financially plan for at different stages. Set a goal, construct a plan and be disciplined in that plan, no matter when you plan to retire."

The next step, according to Gandhi, is to understand your current expenses and anticipate future ones. "You will need to plan early and be committed to carefully choosing what to spend money on," he told Newsweek.

It's also important to have a back-up plan. Gandhi said: "Many may find that even if they don't meet their aggressive early retirement goals, they can still build up enough of a cushion to feel secure. It's important to also have a contingency plan and maintain contacts, networks, licenses and certifications in case something goes awry."

Morrissey explains that investing is the best way of making sure your income grows enough to give you a decent pot to live on in retirement. You need to be aware of stock market fluctuations, however, which can make the value of your assets decrease.

You also have to factor in inflation, "which can take big bites out of your earning power," she said.

retirement savings concept
The FIRE community calculates their financial independence number by multiplying their annual expenses by 25. Getty Images

How Much Do You Need to Retire by 40?

Lannan believes financial independence happens at different speeds and depends on the person's present and future spending habits.

She explains that the FIRE community calculates their "financial independence number" by multiplying their annual expenses by 25. However, this won't account for factors such as investment asset allocation, taxes and penalties. According to Lannan, if you consider these areas, you'll have a better chance of enjoying financial independence to the fullest when you retire.

Health and care costs are another important consideration, particularly in the later years of retirement. Retiring at 40 means you will have to wait 25 years before you're eligible for Medicare—and you'll only get it if you or your spouse paid Medicare payroll taxes for at least 10 years.

Even when you do reach 65, Medicare won't cover all your health expenses. The plan has four different parts covering hospital, outpatient and prescription drug expenses and the level of coverage if offers depends on which parts you're enrolled in.

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple aged 62 may need approximately $300,000 saved (after tax) to cover health-related expenses.

What Is FIRE (Financial Independence Retire Early) and How Does It Work?

Financial Independence Retire Early is a movement that promotes saving and aggressive investment. People who take the FIRE path commit to a frugal lifestyle, avoiding all unnecessary expenses and saving most of their salary for retirement.

The movement was inspired by a 1992 book, Your Money or Your Life by Vicki Robin and Joe Dominguez. The authors' core premise was that people should evaluate expenses in terms of the number of working hours needed to pay for them.

Devotees of the FIRE lifestyle save up to 70% of their annual income while they're working. Once they've saved 25 times their annual expenses, they can retire and live off small withdrawals from their savings pot, usually amounting to 3% to 4% each year.

Early retirement decision with stack of money
You will need to plan early and take care choosing what to spend money on. Getty Images

Early Retirement Calculators

If you're interested in the FIRE lifestyle—or simply in leaving work before your sixties—and would like help finding out how much you would need to retire by your desired age, you can use the Fidelity calculator here or the Vanguard calculator here.

The calculators above are meant to serve as a reference for your calculations, but you may have to manually add some unforeseen extra expenses.

According to Lannan, factors that may affect your early retirement plan include market volatility, inflation and access to affordable health care. All these issues can be managed, she said, "but the person needs to be mindful and plan for them too."

The contents of this article is for informational purposes only and does not constitute financial or investment advice. It's important to perform your own research and consider seeking advice from an independent financial professional before making any investment decisions.