How Much Money Do I Need to Retire at 40?

Retiring by 40 is a dream for many people. You could enjoy a lifestyle that offers more time with family and friends and for pursuing passions. While retiring at 40 requires aggressive saving, it’s possible with careful planning. Determining the amount of money needed to retire at 40 requires weighing various factors with realistic financial projections. Below you'll learn key considerations to answer the question: How much money do I need to retire at 40? Read on and then start planning.

How to Calculate How Much You’ll Need to Retire at 40

Calculating the money needed to retire at 40 will depend on your lifestyle and goals. Regardless of the starting figure, you'll need to account for inflation and healthcare costs that increase as you age. 

Consider your post-retirement plans, such as where you want to live, the activities you wish to pursue and the lifestyle you aspire to have. Then, estimate monthly and annual expenses. Whether you plan to spend $50,000 per year or $200,000 per year will be the foundation to answer how much you'll need to retire at 40. 

Once you have estimated your annual expenses and determined your expected retirement income, you can calculate your retirement savings target. The general rule of thumb is to aim for retirement savings to generate enough income for your expenses for 25 to 30 years. If you're retiring at 40, you'll need to plan for 40 to 55 years. 

Using a financial adviser for retirement planning can make calculating how much you need to retire at 40 easier. They will be able to go through projections for savings, annual returns, withdrawal amounts and how much you'll need. 

Understand the Basic Costs of Retirement

Basic living expenses will continue after you retire. You'll need to account for housing, food, transportation, insurance, healthcare and other essential needs as well as travel, hobbies and lifestyle choices. It's crucial to be thorough and realistic in your estimations, considering current and potential future expenses. 

If you've already paid off your house, housing costs will only include property taxes, insurance and maintenance. But you should build in a generous amount for major expenses — like a roof replacement — that come up after 20 to 25 years. A sample monthly basic living expense budget might include the following:

• Housing: $1,000
• Food: $450
• Transportation: $350
• Insurance and healthcare: $1,000
• Utilities: $200
• Entertainment and travel: $400
• Pets: $1,000

That is $3,500 per month or $42,000 per year. If you add in $8,000 for emergencies and a discretionary fund, you have an annual budget of $50,000. This is a typical modest budget for retirement, but be sure you can live with the budget you set.

Calculate Your Retirement Fund

To calculate your net worth to retire at 40 and build a reasonable retirement fund, take your annual expected spend and multiply it by the years it needs to last. As a 40-year-old planning to live to 95, with the example above, you'd need $50,000 x 55 = $2.75 million. If you want to have $200,000 per year, you’ll need $11 million. Remember, this assumes you spend the principal yearly and doesn't account for inflation. 

A better way to do this is to keep your retirement fund invested. If you can maintain 3% in interest per year to account for inflation, you can take out the difference to live on. 

With the same $2.75 million retirement fund, if you earn an average of 6% annual interest and keep 3% in the account to compensate for inflation and only withdraw the other 3%, you'd have $82,500 the first year for your cost of living and then approximately 3% more each year to account for inflation. 

How much you save each year will depend on your earnings, lifestyle and goals. If your target is to save $2.75 million by the time you're 40 and you're currently 20, you'd need to save an average of $137,500 per year. Consult a financial adviser to better understand how much you'll need to save for retirement in your situation. 

Consider Your Retirement Income Sources

Evaluate your expected sources of retirement income, such as Social Security benefits, pension plans, business ventures, rental income or other investment income. Consider building new sources of retirement income like developing and selling courses, rental properties or additional investments. 

Then, determine the projected income expected from all sources during retirement years. Subtract this income from your estimated expenses to determine the gap that needs to be filled by your retirement savings.

Envision Your Retirement Lifestyle

Now comes the fun part: defining your ideal retirement. With dreaming and planning, you'll be better prepared to maintain the budget you set. 

• Do you plan to spend a month in Europe each summer? That could set you back $30,000 or more. 
• Are you considering flying across the country each month to visit friends or children? Expect to pay $500 each time — more if you want to travel in business class. 
• Do you plan to maintain two homes? Multiply all maintenance expenses by two and account for the difference in size or expenses. 
• Do you want to spend three weeks at a spa twice a year? Budget at least $40,000. 
• Do you want to maintain a membership at a tennis or golf club? Build that into the budget, along with sports equipment, lessons and anything else needed. 
• Are you planning to eat out every day? Plan your food budget accordingly. 
• If you have children, do you want to pay for their college tuition?

Your desired lifestyle will determine your budget. If you plan to continue your lifestyle as it is, look at your current budget and build in some extras for emergencies and splurges. Be sure to also account for taxes on whatever income you withdraw each year.

Develop Retirement Investment Strategies

Retirement savings requires a variety of savings vehicles to build and maintain wealth. The most suitable investment vehicles to help build up retirement funds include stocks, bonds, mutual funds, real estate investments and real estate investment trusts (REITs), annuities and bonds. Invest in these vehicles through an individual retirement account (IRA) or Roth IRA, a 401(k) or other tax-advantaged savings accounts. Speak to a financial adviser who can suggest the best savings vehicles and tax-advantaged accounts for your situation. 

Understand the Risks and Uncertainties

If you retire early, there's a chance you could run out of money. That's because there are always uncertainties in the financial world. Your initial projections may be off if you don't adequately account for taxes, inflation and market fluctuations.

That's where a certified financial adviser can help. They can give you significant insight into how to both build and protect your wealth and ensure you have more than you'll need to account for fluctuations. 

Build Your Retirement Plan With a Professional

Collaborating with a financial adviser can save you hundreds of thousands of dollars and help you adjust your retirement plan as you near your goals. A retirement plan isn't static; it evolves as your financial situation changes. An adviser can advise you on the best strategies for investment and financial protection to build wealth to protect yourself now and in the future. 

Making Early Retirement Possible 

How much do you need to retire at 40? It depends on lifestyle and goals. Is it possible to save aggressively or live off one salary as a couple and save the other? Yes. You could also build passive income streams or businesses that can continue to generate income after you retire.  A financial adviser can help you develop a plan to build your net worth to retire at 40 while ensuring adequate income for life-long financial freedom.

Frequently Asked Questions