Today, we’ll about how to retire by 40 in 3 easy steps. Well, these steps are easy to say, but they are not that easy to do. Most people finish college around the age of 22 and that only gives them 18 years to approach Financial Independence. This is plenty of time if you are 22, but if you are in your 30s and are just getting started, it’s probably too late to get there by 40. You can still shoot for 50.
Get a Job with a big paycheck
The first crucial step is to get a job with high earning potential. Take a look at this highest paying job list and see if your job is in the top 100. It’s much easier to save and invest if you have a job with a big paycheck. If your job isn’t generating 6 figures by the time you’re 30, then you need to earn more money somehow. Building a business on the side is a good way to generate extra income. Self employment is also a great way to earn more money, but it’s more risky as well.
Minimize Lifestyle Inflation
The second step is even more important than the first. Most people increase their spending when their earnings go up. This is lifestyle inflation and it will absolutely derail your chance of early retirement. Once you are used to a certain level of lifestyle it’s much more difficult to cut back. Another important thing to keep in mind is that you will need a bigger nest egg for retirement as you inflate your lifestyle. Bigger nest egg = more time working. That’s why it’s better to keep your lifestyle moderate when you are young.
Minimizing lifestyle inflation is very difficult because everyone around you will buy big houses, luxury cars, and spend a lot of money on entertainment. You have to remember that every dollar spent on luxury goods will earn much more if you invest it instead. A new BMW can cost $20,000 more than a recently used Hyundai. If you invest that $20,000 and receive 7% annual earning, then you’ll have over $150,000 in 30 years. In contrast, the new BMW will become a rust bucket much sooner than 30 years.
Grow Your Net Worth
The 3rd step is to grow your net worth. If you earn a lot of money and can keep your lifestyle to a modest level, you should be able to save a big chunk of your income. Most people think saving 10-15% of their income is enough, but this is not going to work for the Retire By 40 Movement. You need to save 40-60% of your income to have a chance at financial freedom.
My suggestion is to max out your 401k and Roth IRA to start with. After that, invest the same amount in a taxable brokerage account. This is more difficult in the beginning when you are just starting out, but it should be doable after a few promotions. Having investments outside of the retirement account is crucial to early retirement. These investments can be geared to generate income so you won’t have to dip into your retirement fund after you quit your day job.
It’s important to be diversified when you are growing your net worth. If your only investment is in the stock market and it tanked, then you will need a lot of time to recover. It’s better to be invested in a variety of wealth-building assets such as stocks, bonds, CD, rental properties, commodities, and peer to peer lending.
Paying off your debts is also a part of building your net worth. The best policy is to avoid consumer debt as much as possible. Investment debt on the other hand is really up to you.
*update* Step 4 – Put off withdrawal. If you can put off withdrawal, then you don’t need to accumulate a huge retirement portfolio. Click over to read about the FIRECalc retirement calculator and how it can help you.
Optional – Find a hobby that can earn some money
A person who is disciplined enough to carry out these 3 steps is unlikely to desire a traditional retirement. It’s important to explore your interests and see what you want to do after leaving your big bucks job. Many people are able to leave their day job and pursue their hobbies once they make a little income from them. A little income goes a long way when you live a modest lifestyle. Here are a few examples from the Personal Finance blogosphere.
- Mr. Money Mustache took up carpentry and is making income from that.
- Justin @ Root of Good retired from his civil engineering career when he was 33. He and his family are living the good life at a very moderate cost in North Carolina. I’m always jealous when I see his monthly expense report.
- Jeremy and Winnie @ Go Curry Cracker retired early to travel the world in their early 30’s.
- Glen @ Free From Broke left his job to be a full time parent and work on web publishing.
- Sam @ Financial Samurai is exploring self employment in the internet marketing arena. His sites are already generating good income, but there will be more to come from Sam.
- You can see many other Early Retirement blogs here.
That’s it. Easy, isn’t it? Here are a little more details on how I did it.
- Job. I was a computer engineer and left a six figures salary job earlier this year.
- Lifestyle. We live a relatively modest lifestyle and spend about $4,500 per month. See our monthly cash flow posts for the detail.
- Net worth. I maxed out my 401k contribution for many years and built up a modest nest egg. Now that I’m not working anymore, I won’t be able to add as much o the retirement fund. However, I don’t plan to touch the retirement funds until I’m in my 60s. This will give it 20 more years to grow. Instead of drawing from the retirement fund, I’m using the income from my dividend stocks, rental properties, and peer to peer investments to help pay the bills.
- Hobby – I’m generating some income from blogging and freelancing. This is very helpful and if I didn’t have them, I would have continued at my job for a few more years.
As you can see, it is possible to retire from your career before you’re 40 to pursue other interests. This is much easier if you start out with this goal in mind when you are young. Most people realize they yearn to be free from a job a little too late to reach this goal. I didn’t know I want to quit my career when I was in my 20s. I was just lucky that I was frugal by nature and saved a large portion of my earning.
Are you happy with your career? If not, how are you planning to get out?
There is a great new website to help you manage your investments – Personal Capital. You can keep track of your income, expenses, and investments, all in one place. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.
