For many Americans who have a tough time saving, retiring at age 40 can seem like a pipe dream. But as the old saying goes, if there’s a will, there’s a way. To save enough money for a comfortable retirement by early middle age, you’ll clear some high hurdles and adopt a spendthrift mindset.
“Yes, retiring at age 40 is realistic if you either have a very high salary or you’re willing to delay gratification and save money to invest instead,” said Anne McGinty, a San Francisco-based entrepreneur and host of the podcast “How I Built My Small Business” who retired at age 39, in an email. “There are primary challenges in doing so, including saving enough money at the beginning to be able to start making investments and to be able to borrow money to increase your earning potential while on an entry-level salary.”
Most U.S. career professionals aren’t doing that. The median defined-contribution plan balance of savers aged 25 to 34 is a meager $11,357, according to a 2023 savings report from Vanguard. At ages 35 to 44, the median plan balance is only modestly higher at $28,318.
To set yourself up for retirement at 40, follow these guidelines:
— Focus on being realistic.
— Calculate your financial goals.
— Make room for dividend stocks.
— Prioritize dividend stocks.
— Develop solid personal finance skills.
Be Realistic
Accumulating enough money to retire at 40 is difficult, given that you’ll likely have to save enough cash to last for 40 or even 50 years. Retiring at 40 carries significant risks.
“Those risks include outliving your savings, losing purchasing power due to inflation and investment volatility that might force you to withdraw more than planned,” said David Hegarty, CEO and co-founder of Playbook, a financial app geared toward millennials, in an email. “These factors provide little margin for error, but having more savings can mitigate these risks.”
“If taxes change, inflation increases, or the market downturns, you have little flexibility to adjust. However, the more you have saved, the lower these risks,” he said.
You’ll have to factor in opportunity costs, too.
“Once you stop earning W-2 income, you may not be able to qualify for additional loans or refinancing, so you’ll want to borrow all of the money you want before you stop working,” McGinty said.
“At that point, you’ll need to look for alternative lenders and understand that there are additional steps and documentation required to demonstrate your ability to repay a loan, to buy a home, a car, or to start a small business if you decide you want to get back into the career experience,” she added.
[READ: A Guide to the FIRE Movement.]
Establish Savings Goals
A crucial first step is calculating how much your retirement lifestyle will cost.
“Work on acquiring investments and building up passive income so that the cash flow is enough to pay for you and your family’s ongoing living expenses,” McGinty said. “You’ll also need separate money sources that can stay invested long-term without being touched and let that grow for as long as possible, like a 401(k) plan or investment property.”
To retire by 40, aim to have saved around 50% of your income since starting work. “That’s going to take some real discipline,” said Michael Gilmore, a former investment industry executive and founder of the Money Awareness and Inclusion Awards, a global financial literacy organization, in an email. “If you’ve done that, you’re probably in good shape.”
Upon retirement at age 40, you’ll need enough money to draw down 4% to 5% annually. That’s the cash you’ll have to live on throughout your retirement.
“There’s a simple equation to know if you’re even in the right ballpark as you’re saving for an early retirement,” Gilmore said. “Take your living expenses for the year and multiply by 25. If you spend $60,000 a year, that’s $1.5 million. If you have investable assets of more than that — not including the house you live in — you should theoretically be able to retire at age 40.”
But there are unknowns to look out for, noted Gilmore. “The investment markets may not always go where you expect, and your expenses may be unpredictable. Additionally, you’ll need to keep some of your assets in more liquid form to access it if you need to, and you can’t afford to lose your investment returns.”
[7 Lessons From Those Who Retired by FIRE]
Emphasize Dividend Stocks
While there will be myriad unknowns as you save for retirement at 40, there are also some solid stabilizers and dividend stocks are one of them.
The most robust dividend stocks typically come from well-managed companies with a long history of generating revenue. Usually, these stocks pay yields in the 2% to 5% range. Anything lower may not be worth the trouble. Stocks paying dividends higher than 5% may be too risky for an early retiree who typically can’t afford to make any portfolio missteps.
“Markets won’t always go the way you want, but dividends can be a good strategy to deploy,” Gilmore said. “For instance, if half the money you need annually comes from dividends, you won’t need to sell so many assets once you retire.
[READ: 10 Steps to Maximize Your IRA]
Max Out Retirement Plan Contributions
Take advantage of the maximum annual 401(k) plan and IRA contribution limits while you can. For example, in 2024, the maximum allowable 401(k) plan contribution limit stands at $23,000 for individuals and $69,000 for combined employee and employer contributions. IRA contribution limits are $7,000 for 2024 for those under age 50.
Consider your retirement funds as a great opportunity to significantly boost your savings as well as an opportunity to leverage some professional money management expertise for your entire retirement savings campaign.
“If you haven’t already, this might be the time to bring a financial advisor into the picture,” said Andrew Latham, a certified financial planner in Rolesville, North Carolina, in an email. “Their expertise can offer invaluable insights tailored to your specific financial landscape.” Keeping current on the latest tax laws and retirement policies is also crucial, as seemingly minor changes can dramatically reshape one’s saving strategy. Lastly, while it might be tempting, try to steer clear of hefty new debts, especially those riddled with high interest rates.
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How Much Money Do You Need to Retire at Age 40? originally appeared on usnews.com
Update 06/13/24: This story was published at an earlier date and has been updated with new information.
