Retirement at 40 might seem like a fairy tale, but experts say it’s possible if you’ve got the right plan. In fact, more and more people are shunning the idea of waiting to retire until 65, or 55 for that matter. “Ambitious young workers, primarily in their 30s, but also in their early 40s and even their 20s, are turning the traditional idea of retirement on its head,” reports USA Today.
“Irrespective of how Wall Street paints the retirement picture and the supposed need for unique products and sophisticated financial planning, retirement boils down to four variables,” Darryl Franklin, president of Oakwood Wealth Advisors, explains to MadameNoire. “1) How much do you need to draw from your investments monthly? 2) What is the total value of your current investments? 3) How many years do you have before reaching retirement in this case, age 40? 4) How much can you commit to add to your investments each and every month?”
Are you ready to do a little math?
“If your age of retirement is locked in at 40, then variable “a” = 40 minus current age, variable “i” = value of current investments, variable “d” = draw pool, variable “s” = stash away in an investment (savings) vehicle. Then solve for d = i + (s x a),” Franklin says. Note that “40 minus current age” must be converted to months. (So if you are 35 years old, it would be as in 40-35 = 5 years times 12 months = 60 months.)
Let’s take the generous example of a 35-year-old woman who has $180,000 income, a $600,000 investment portfolio and she is able to save 20 percent of her monthly take home pay of $15,000 (or $3,000 in savings each month). Therefore, draw pool = $600,000 + ($3,000 x 60). She will have saved $780,000 for retirement. Divide this amount by 4.5 percent to get the amount she will have to live on each year for roughly 22 years. So at age 40, she’ll have $35,100 annually to live on or $2,925 per month–before Social Security.
You can base the number of years it will take you to retire by the percentage of your income you set aside. Most often, people save 15 percent, which means retirement after 45 years of employment. “If you are able to save 30 percent of your take home pay, your working years fall to about 30. At 40 percent the necessary work years before retirement falls further to about 20. And if you are able to save 50 percent of your take home pay, you’ll begin enjoying your golden years in less than 20 years,” reports US News & World Report.
To save this much there will be major sacrifices. “Early retirees shun certain expenses many of us take for granted, such as expensive cable and cell phone packages. They tend to spend less on cars and transportation, often living close enough to work to either bike or walk. They also spend less on food, eating out less frequently than most,” reports US News.
It may sound a little overwhelming (and ambitious), but you can use this formula to figure out how much you need to save to retire at any age. Of course, the more you make the more you’ll be able to save. And if you love your work, then doing it for a while longer to ensure that you have sufficient nest egg won’t seem nearly so daunting.
“If you are thinking through the issues of retirement you are already ahead of most Americans. Take the next step and write down your goals that you read once day for the next 30 days until financial planning becomes a habit of your life,” says Franklin. “If you are disciplined you can manage the process yourself. If you would like someone to help hold you accountable then a financial planner or advisor will be of value.”
Consider investing in addition to your 401K. But proceed with care. “Extreme early retirees must be very savvy in managing their nest eggs. If they’re too aggressive, or make a big mistake, such as panicking and selling in a bear market, they could devastate their portfolios. But if they play it too safe, they won’t get the returns they need to make a portfolio last for 60 or more years,” reports USA Today.
Also, don’t forget about the things you will need in retirement, such as health care. “If there’s one expense that will likely go up for most people in retirement of all ages it’s health care. After all, you won’t have insurance through your employer anymore. This is especially true for anyone retiring before 65, which is the age you can qualify for Medicare. That means someone in their 40′s could have to pay premiums for over 20 years,” reports Forbes.
Get an estimate of how much you will need to set aside for insurance from ehealthinsurance.com. And according to Franklin, you can take these steps to start preparing for early retirement:
–Envision It! “Believe it is possible and that you deserve to accomplish early retirement,” he says.
–Invest Wisely. To retire early you may have to take some investment risks for bigger payoff. But use an advisor to help guide you. “Choose investments that are relatively safe and provide growth/income
–“Monitor the investments closely, preserving capital, and avoiding losses,” notes Franklin.
If all works as planned you can enjoy a “worry-free retirement and freedom to choose how to spend your time,” says Franklin.