How to retire at 40

Picture waking up and realizing you've finally reached financial independence at age 40. No more 9-to-5 slog, no more financial worries. Does that sound impossible? It's not. Many people have realized this dream, and so can you. Read on for tips about how to make early retirement a reality. 

Calculate your retirement needs

Determining your financial needs is your first critical step toward retiring early.

Factor in healthcare costs

Healthcare might be one of your most costly expenses in retirement. You should plan for these costs meticulously. 

Research various health insurance plans, particularly if you've typically depended on an employer-sponsored option. If your partner is employed, check whether you can be added to their plan. Include this cost in your overall retirement plan to ensure you’re covered.

Anticipate lifestyle changes

Your lifestyle will probably change in wonderful ways as you transition into retirement. You'll finally have the chance to enjoy more free time. Hobbies, travel, a new home, or more time with friends and family may be exciting chapters in your future. To prepare for these changes, factor them into your retirement budget. Be as specific as possible in your planning. 

If you plan to travel, list your desired destinations and draft a budget for each trip. Include expenses for transportation, activities, meals, and lodging. If you are buying a new home or relocating, research how it will impact your fiscal plan. Be sure to factor in the costs of down payments, closing costs, property taxes, homeowners insurance, and moving fees.

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Set a clear and achievable savings goal

Get realistic and specific about your savings goals. It will help you control your retirement. Remember to include a buffer for unexpected costs.

First, calculate your annual expenses. Multiply that answer by the number of years you expect to live in retirement. This number equals how much you need to retire at 40.

Practice smart spending habits

Track expenses to find areas where you can cut back your spending. Examples might include:

• Eating in more frequently rather than dining out or ordering takeout

• Canceling or downgrading subscriptions that you don't use frequently 

• Upgrading your gadgets and electronics less frequently 

• Reducing energy usage to cut utility costs

• Planning more budget-friendly vacations

Trimming unnecessary expenses here and there can equal big savings.

Explore the FIRE (Financial Independence, Retire Early) model

The FIRE model has become popular for a great reason. It emphasizes aggressive saving and investing to help you reach early retirement. It also encourages living below your means and investing wisely. Take some time to explore the principles of FIRE and see how they might fit into your strategy of how to retire early at 40:

1. Minimize expenses: Try living a bit more frugally and see where you can cut out unnecessary costs.  

2. Increase income: Think about taking on some extra work or starting a fun side hustle.  

3. Invest wisely: Make sure to do your homework and look into diversifying your investments.

Create a budget to track income and expenses

Think of your budget as your pathway to fiscal freedom. Your budget can give you a clear view of your financial health and guide you to your retirement goals. When well-structured, it can reveal overspending. It can also motivate you to be proactive. 

Budgeting software can make this easier. You can use it to classify your expenses, savings, and investments. Remember to be consistent and adaptable when budgeting — life is full of unexpected events, and you want to prepare for them.

Prioritize retirement savings

When drafting your budget, make income for retirement a top priority. Popular budgeting guidelines like the 50/30/20 budget (spending 50% of your income on needs, 30% on wants, and saving 20%) probably won't get you there. If you want to retire at 40, your goal should be to save closer to 50% of your salary. Starting early lets your money grow with compound interest. Consider setting up automatic contributions from your paycheck or bank account. This proactivity can make retirement saving an easy part of your financial plan.

• Invest in 401(k) plans: These plans offer worthwhile tax perks, like lowering your taxable income. Max out your contributions to cash in on employer-matching amounts. 

• Take advantage of a health savings account (HSA): HSAs come with three tax incentives. First, your contributions are pre-tax. Additionally, any interest or earnings in your account grow tax-free. Finally, withdrawals for approved medical charges are also tax-free. 

• Open an IRA: Traditional IRAs allow tax-deductible contributions and tax-deferred growth. Roth IRAs permit tax-free withdrawals in retirement and no required minimum distributions. Whichever one you choose, max out contributions to reap maximum benefits. In 2024, that maximum stands at $7,000 for individuals under the age of 50.

• Explore annuity plans: They can provide a steady retirement income and prevent you from outliving your resources. There are many types you can add to your fiscal plan.

Engage in passive investment strategies

Passive investment strategies offer an approachable way to grow your financial security over time. They are a popular option because you don't need to monitor or trade them constantly. Instead, they focus on long-term growth. 

Passive investing can provide stability and peace of mind. They allow you to focus on other life priorities. Here are some examples of passive investing you can consider:

• Invest in rental properties: Rental properties can provide a steady income stream. Research the real estate market to find profitable investment opportunities.

• Explore dividend stocks: Invest in companies with a tradition of paying dividends. This technique can result in a regular stream of income. 

• Diversify investments: Diversification is essential for limiting risk while boosting rewards. Spread out your wealth among asset types. This includes equities, bonds, and real estate. 

Consult with a financial advisor

A financial advisor can give guidance tailored to your circumstances. They may help you build a complete retirement plan. 

Make a list of questions on how to retire at 40, such as: 

• How much do I need to save to retire at 40?

• How much should I be saving each year?

• What type of investments should I consider?

• How can I make my retirement income last throughout my lifetime?  

• What additional steps should I take?

Your advisor can help answer questions on everything from investment planning to taxes. 

Monitor your progress regularly and adjust your plan as needed

Track your progress to keep on target by routinely comparing your savings balance to your financial goals. Closely monitor your investments to assess their growth. You may need to make changes, such as adjusting contribution amounts or reallocating assets for better returns. You also may need to revise your goals depending on life changes or market conditions. Consistently review your budget and spending habits to identify other savings opportunities. 

Explore Greenlight’s tools and resources 

Greenlight offers various tools and resources to help you on your financial journey. 

From budgeting apps to investment calculators, Greenlight's tools can help. Explore Greenlight’s offerings to find the tools that best suit your needs.

FAQs for retirement at 40

How much money do you need to retire at 40?

Multiply your annual costs by the number of years you plan to live in retirement. Include a cushion for unforeseen events.

Is $2 million enough to retire at 40?

If managed wisely, yes. It all depends on your retirement lifestyle, annual costs, and investing methods. Consult a financial advisor for a more complete review.

How much should a 40-year-old have in a 401k?

It varies based on individual financial goals and retirement plans. Aim to have at least three to four times your annual salary saved by age 40.