The idea of retiring early, which was formerly nothing more than a fantasy for most Americans, has been gaining real-world traction over the past 10 years. Encapsulated by the “Financial Independence, Retire Early” movement — also dubbed “FIRE” — it’s a concept that more and more younger Americans are embracing.
However, behind the dream of retiring early is the hard math that retiring at 50 or even 40 requires. For example, if you think you might be able to retire with a $1 million nest egg at 65, retiring at age 40 may require three times as much — and you’ll have a much shorter time to acquire that money. Here’s a look at what you might need to retire at age 40 or 50, along with a list of things you shouldn’t overlook when planning an early retirement.
Let’s face it, retiring by 40 under any circumstances is ambitious. The major problem with retiring so early from a financial perspective is that you’re giving up time to save and extending the time you’ll need your money to last.
For example, if you retire at 65, you might only need your money to last 20 years or less. But if you retire at 40, you haven’t even lived half your life yet. According to IRS tables, you should expect to live nearly 46 additional years from age 40. If you plan on spending $50,000 per year in retirement, that comes to $2.3 million in lifetime retirement spending. If you adjust that amount up for inflation every year, you may need $3 million or more to retire relatively modestly at age 40.
Retiring by age 50 is much easier mathematically than trying at age 40, but it will still take a lot of planning — along with a lot of saving and investing.
For example, if you want to live off $50,000 per year, by retiring at age 50 you might only need $1.8 million in lifetime retirement spending, as your life expectancy according to the IRS at age 50 is about 36 years. Plus, you’ll have an additional 10 years to save and invest your money, which will make reaching your retirement goal that much easier. Still, you’ll need to begin an aggressive investment program at a young age to make this goal feasible.
