Although a Wells Fargo survey from 2013 found that 34 percent of people believe they won´t be able to retire until at least age 80 before and an incredible 37 percent said they´ll never retire, it is possible to retire early. The key is in the planning.
“It is definitely possible to retire by 40 if you’re willing to make sacrifices such as saving a substantial portion of your income and keeping your living expenses very low relative to your income,” notes Steven Elwell, vice president of Schroeder, Braxton & Vogt Financial Advisors.
You also need to define what retirement means for you. “For some, retirement means having the ability to stop working, work less, or switch to a lower-paying but more meaningful career because finances are not a concern. For others, it means completely walking away from employment,” notes financial coach Ozeme J. Bonnette of Tri-Quest Investment Advisors. “To take it a step further, what one does (or wants to do) in retirement plays a key role in answering the question. Is one’s retirement lifestyle very simple, or is it extravagant? So, yes, it is definitely possible to retire at 40. Whether or not one is able to live as anticipated is another story.”
Start planning early for retirement. “If you’re fresh out of college and want to retire at 40 you better start breaking down the numbers immediately and put together a game plan,” says Elwell.
Steps To Early Retirement
Determine Financial Need: You will need to know how much you will need to live on in your retirement. “Figure out how much you need to live on each year, this will help determine how much you need to save,” advises Elwell.
Save, Save, Save: If you spend your entire paycheck each week, how will you be able to retire? “Determine what you can afford to save each pay period and commit to saving consistently,” says Bonnette . “Make sure you max out 401ks and IRAs (Traditional or Roth), you will need all the help you can get to retire early and these types of accounts provide valuable tax breaks,” adds Elwell.
Live Accordingly: Obviously if you are planning to retire early, you will have to keep your debts low. “Live within (or below) your means so that there is more discretionary income available to save toward the goal. We sacrifice now or later. The choice is ours,” Bonnette points out. “Don’t buy what you can’t afford. In fact, pay down as much debt as possible before retiring.”
Take Risks: In order to make extra money, you will ave to let your money work for you. And this will mean taking a few financial risks–some of which will work out, others which might not. “Invest aggressively when you are starting out if you can handle the fluctuations without bailing during the inevitable periodic downturns. You will need to potential returns stocks offer to help meet your goals,” suggests Elwell.
Inflation Matters: You will have to take into account tour retirement. “Don’t forget about inflation, you will need to prepare for the effects of inflation on a long retirement,” says Elwell.
Account For Medical & Other Costs: As you get older your medical costs will most likely increase. Make provisions for this in your retirement plans. “Plan for potential health care costs, these unexpected costs are one of the most likely obstacles to a successful early retirement,” offers Elwell. Adds Bonnette: “Research new expenses that you might have in retirement so that you are prepared for them. This is especially important when thinking about health, dental, eye benefits. If an employer is no longer assisting with the cost, this will likely be higher if paying out of pocket. Medicare won’t kick in until 65, so this may be a new expense that should be worked into the budget.”