Extreme Early Retirement: What It Takes To Say Goodbye To Work At Age 40

It’s called “extreme early retirement.” It’s one of the terms used when people want to retire as early as age 40.

Mind you, we’re not talking about folks who want to retire to a tiki hut on the beach and keep their living costs below $5,000 per year.

We’re talking about affluent people who want to leave the workforce, but keep living the good life complete with all the creature comforts they’re accustomed to.

So what does it take to retire extra early?

First of all, let’s review what we know about retirement at any age. It takes more money than it used to, due to longer lifespans, lower anticipated investment returns, higher medical costs, and fewer guaranteed sources of retirement income, like pensions. In short, when it comes to retirement, you’re pretty much on your own nowadays.

Overall, “most people will likely need to save considerably more than they thought for a secure retirement,” say retirement experts at the American Funds.

For most people, it’s challenging to retire at age 55, 60 or even 65. Our job, of course, is to make it easier, by helping clients save and invest wisely, and make smart financial decisions.

If you do want to kick back at age 40, you’ll need to save about 35x the amount you spend each year. As an example, if your current spending is $100,000 each year, you’ll need to save about $3.5 million. (Picked yourself up from the floor yet? Read on.)

Wait until age 60, and you need only about 25x to 30x your annual spending amount. (Don’t freak out; for most people, a significant chunk of that will come from Social Security).

Keep in mind that many retirement rules of thumb, such as that saying you can withdraw and spend 4% of your portfolio each year, are modeled on people retiring at age 65 with about 30 years to spend in retirement.

If you retire at 40, you could spend 55 years or more in retirement, and that completely changes the rules of the game.

Scared yet? Don’t be. But there are a few pointers to keep in mind if you’re set on retiring early:

Get professional help. You need expert and objective advice to meet the challenges ahead and sidestep major mistakes. “Objective” means only take advice from a fiduciary; don’t rely on someone who is only interested in selling you investments and pricey insurance products. “Expert” means you don’t want to wake up at age 85 and find you seriously miscalculated.

Save and invest the smart way. You need lots of assets and a good plan for growth to keep you solvent through your advanced old age. Maximize tax deductions, leverage retirement accounts, and invest strategically.

Think about what you do want to do each day. Money is only part of the retirement equation. Spend just as much time planning meaningful activities in your retirement as you do worrying about how to pay for it.

Things go wrong. Build your retirement plan with plenty of room for error, and don’t forget backup Plans B, C and D. Life doesn’t always work out the way we plan, but whatever happens, make sure it’s an amazing journey.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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