How To Retire Before 40

The answer is not hitting the lottery or having a fat trust fund.  If you want to retire before you turn 40, you’re going to have to be very intentional about it.

It absolutely can be done, and it does not have to suck.

You also don’t have to retire just because you can.

You may love your job and have no desire to leave it.  If you’ve found that perfect balance between fulfillment and contribution and hard work and life balance, that’s amazing!  Hold onto it!

Even if you have achieved that perfect balance right now, that doesn’t mean it will stay this way forever.  It very well may.  But something might come along down the road and push it off-kilter.

It may be worth having the option to retire before you were planning to.  Or to just take some time off.

Or maybe you want to have enough squirreled not for retirement forever, but for some time off if you end up needing or wanting it for a few years.

What Is The 4% Rule?

In a nutshell, the 4% rule is a good rule of thumb to use to figure out how much money you need to retire so you won’t run out.

It’s conveniently a nice round number, too.  Multiplying your annual spending by 25 (4% withdraw rate) is cleaner and easier to remember than by say 28.5714 (3.5% withdraw rate).

Anyway, running out of money in retirement would be less than optimal, right?

So let’s plan to not do that.

Simply stated, the 4% rule says if you withdraw 4% of your portfolio from the market each year, you won’t run out of money.

This is based on the study Retirement Savings: Choosing A Withdraw Rate That Is Sustainable or more commonly known as The Trinity Study.

The Poor Swiss “updated” the Trinity Study into 2020 and looked at a 40 year timeline in addition to the original 30 years. 

You can read through the study and Google will provide you with a lovely rabbit hole to dive into if you so choose.  There are plenty of articles all over the interwebs both supporting and picking apart the 4% rule.

Other things to consider with the 4% rule is your portfolio allocation, inflation, sequence of return risk, etc. etc. etc.

Right now, if you’re just starting out, or you’re trying to figure out a ballpark goal number to start, or continue, working towards so you’ll have a reasonable chance of a successful retirement plan, it’s good enough.

As you get farther along and learn more and dive into the weeds a bit you can adjust your plan as necessary.  It comes down to a matter of personal preference with respect to risk tolerance, and your level of flexibility with your retirement spending.  

And of course correct math and assumptions.

Big ERN at Early Retirement Now has lovingly created his own rabbit hole of great information, explanations, calculations, things to be careful of, so much stuff.  He lays it all out and simplifies his extensive knowledge on the subject in his Safe Withdraw Rate Series.

You might learn that the 4% rule is right for you.  Big ERN may convince you otherwise.  Later on, you may decide to adjust your benchmark to 3.5% or something else entirely.

However, right now as far as the big picture is concerned, 4% is a great starting point.  It’s not a random number, there is plenty of math behind it.  

Just start walking right now, and you can make adjustments to your path as you deem necessary.

How Do I Do It?

Surprise!  By saving up a bunch of money.

It may not be as much as you think you need, or it may not take as long.

Check out Mr. Money Mustache’s Shockingly Simple Math.  It doesn’t have to be by 40.  It can be whenever you want.

You can go about this one of two ways.

1. Figure out when you can retire based on your current savings rate
2. Decide when you want to retire then adjust your savings rate to support it

Ok, lets back up.

The real first step is to know your savings rate.  You have to know how much money you’re saving to figure out how long it’s going to take you to save as much as you need to retire.

You also need to know how much your lifestyle costs (aka your spending rate) to know how much you need to retire.  It’s probably not the $10 million you may be thinking.

How much do you need to retire:

1. Determine your savings rate
2. Use your savings rate to determine your annual lifestyle costs (spending rate)
   1. You can also use your spending rate to determine your savings rate
3. Multiply your annual spending rate by 25 (the 4% rule)

The number in step three is a reasonable estimate of how much money you need in a market portfolio to retire and continue spending annually what you’re spending now.

You can also take your current portfolio value and multiply it by 0.04 (4%).  That number is how much you can withdraw from your portfolio to live on based on the 4% rule of thumb.

If you have other income sources for retirement such as a pension, rental property income, or a sustainable side-gig, you can adjust how much you’ll need to pull out of your portfolio each year accordingly.

Decide What You Want

Ok so now you have a starting point.  The next step is to figure out what you want.  What are your long term goals?

They don’t have to be exact or permanent.

Having an idea of where you’d like to go helps to answer the questions like:

1. How much money do I need to retire?
2. When would I like to retire?
3. Do I need to adjust my savings rate to be able to retire when I want?
4. Do I need to adjust my savings rate to be able to have the lifestyle I want in retirement? 

Even if you don’t want to, or plan to retire by 40, I hope this gives you something to think about.  

Personal finance is personal.  

I know it’s cliche, but it’s true.  

There’s no one right answer.  

It’s amazing how much peace of mind you can give yourself just by knowing you have a rough idea of where you want to go and that you’re walking in that general direction.