Want to Retire by 40? Take a Look at These 4 Tips

Does the upcoming new year have you rethinking your life and priorities? If so, you're not the only one. 

The pandemic has caused many individuals to make decisions about their values and often analyze and change their values. Roughly two million more people unexpectedly retired during the pandemic, according to the New School's Schwartz Center for Economic Policy Analysis.

Choosing to retire when you're closer to 60 may require you to make a completely different set of actions compared to what you'll have to do by age 40. Let's take a look at how you may approach retiring by 40. Taking action now is important because you have a smaller time frame on your hands, whether you're 30 or 35 at this point. 

Tip 1: Choose the right FIRE method for you.

What is FIRE? It stands for Financial Independence, Retire Early, and it means achieving financial independence so you can achieve the right retirement for you. The Trinity Study initially suggested the 4% rule, which stated that if you withdraw 4% of your initial portfolio every year in retirement, you can sustain your retirement lifestyle and adjust for inflation every year thereafter. You may need to consider withdrawing less to last up to 50 years — consider withdrawing 3% of your portfolio value. It can help you conserve the money in your accounts.

However, people have become FIRE doesn't refer to one set of circumstances that fit everyone's needs. 

• Lean FIRE: Lean FIRE means only covering very basic necessities, such as food, transportation and housing costs and saving the rest for retirement. 
• Fat FIRE: Fat FIRE refers to the practice of choosing to live off of a little more — not taking on extreme frugality or giving up certain creature comforts.
• Barista FIRE: With Barista FIRE, you retire while holding part-time jobs for income and health benefits. 
• Coast FIRE: Coast FIRE means you determine how much you need to boost your retirement accounts, and then when they are plump, retire comfortably without having to contribute any more money to them.
• Slow FIRE: Slow FIRE balances enjoying the process of retiring as much as getting there. You're not in a rush with Slow FIRE. You create a slow, simple plan to automate your way to financial independence.
• Flamingo FIRE: Flamingo FIRE combines semi-retirement, early retirement and traditional retirement. You retire while your money continues to grow — another version of coasting.
• Adventure FIRE: This method sorts money into living frugally with day-to-day expenses and spending money stays in a "splurge" investment account.
• Boat FIRE: Boat FIRE refers to living on a cruise ship by stringing together cruise itineraries. 
• Spouse FIRE: Spouse FIRE allows one spouse to stay home with kids or pursue a part-time job while the other spouse works.
• Financial Independence Work On Own Terms: In this case, you choose how you exchange time and services for money. You work on your own terms instead of letting a job dictate how much you work.
• Fast FIRE: Fast FIRE refers to retiring as fast as possible — in as few as 5 years — by working like crazy and making a lot of money. 

Which option works best for you? You can see that some, like Boat FIRE, don't necessarily allow you to quit working for the rest of your life. Some may not seem like "true retirement" to you, but it's important to identify whether you really want to quit working for the next 20 years or not. 

Tip 2: Save 50% or more of your income. 

If you want to truly retire, you'll need to save 50% or more of your income. How much will you need to save to support yourself to live throughout old age? Consider that you also won't have access to Social Security or Medicare in the early years of your retirement, which means that you need to consider how you'll provide yourself with health insurance or supplement your income.  

Spend some serious time considering how much money you'll need in retirement, also called your FIRE goal. You can use a calculator to determine your FIRE age, and run different scenarios through a calculator. You may learn that you need to submit more money to your investment and retirement accounts or adjust your FIRE age.

Tip 3: Choose the right vehicles. 

What retirement vehicles make the most sense for you? It's a great idea to invest in a 401(k) to get the employer match. However, note that you cannot access certain investments until age 59 ½. 

Employees can contribute up to $20,500 to a 401(k) in 2022. Those 50 or older can add in an additional $6,500 catch-up contribution. It's a great idea to max out your retirement even though you may not be able to access the money without paying penalties by age 59 ½. 

According to Vanguard research, almost 90% of your investment portfolio’s performance is the result of your asset allocation. Vanguard recommends investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds for FIRE retirees.

Tip 4: Minimize expenses.

When you spend money on investment fees, this means that those dollars don't go into your pocket when you retire. 

For example, let's say you invest in mutual funds that have an expense ratio of 2% to manage your money, that leaves you with only 2% to spend in retirement if you stick to the 4% withdrawal rule. It's a good idea to keep your expense ratios at 0.1% or lower. 

Start Planning to Retire by 40 in 2022

If working for 45 years doesn't appeal to you, you may want to consider FIRE. Note that the traditional view of FIRE (of living on basically nothing) is no longer the only option. These days, FIRE can mean just about anything you want it to. You can choose from various lifestyle choices instead. 

If you want to take a half-and-half approach (half work, half play) you can make that work under FIRE — anything is possible!