How to retire at 40

Submitted by Zach on Sun, 06/12/2016 - 19:32

Avatar Zach CyclingWhenever I tell people I retired at 40, I always get the same question. "How did you do it?" So, I decided to gather my thoughts on the subject and write them down here. This won't be a foolproof recipe that everyone can use however. I didn't have full control over the circumstances that got me here.

The two second answer is: I was lucky,and then made decisions that took advantage of the luck.

First of all, the luck. I didn't win the lottery or inherit a trust fund, but there are many lucky facts that contributed to my situation. Being a white male born in the 70s in the U.S. helps a lot. I grew up in a middle class family with wonderful and supportive parents. I was able to afford a college education with some grants, loans, and help from those same parents. All this put me in a position to succeed. With the shrinking middle class and the rising cost of a college education, these advantages are sadly no longer helping the younger generations like they should be. Another lucky thing in my favor is relatively good health. Healthcare complications can break a person's finances quicker than almost anything else. Getting exercise and eating well helps, but even people who do everything right can get sick.   

Taking advantage of opportunities is key. I can link my early retirement to a few key decisions I made over the years.

I chose a profession that helped

I chose to get a degree in Computer Science, a profession which pays well even with only a bachelor's degree. Doctors and Lawyers may make more money, but in general they also have to go to school longer and take on more student loan debt. There are so many people in this world that have worked and toiled much harder than I have, and they probably all deserve an early retirement more than I do. But the fact is, my choice of profession gave me an unfair advantage over those people. Along with this came some more good fortune. I got into the job market right at the end of the dot-com boom, and managed to secure a permanent position at IBM just before the bubble burst. A few more months, and contractors were getting laid off, and the market shrank considerably. There was no way for someone like me to predict this would happen. Just capitalizing on the unpredictable nature of the job market.

I tried to spend wisely

There is nothing wrong with spending money on things that you need, and even on some things that you just want to have. However, I tend to look closely at where my money is going. Every purchase made is postponing retirement just a bit more. I ask questions like, "If I buy this thing, how many hours/days of my life will I spend using it? How much retirement time is being sacrificed for this?" When you consider the way investments can compound over time, it could be quite a lot. When buying things, I do research, and go for durability, longevity, and reliability. It is better to spend more on something durable, reliable, and long lasting than to buy something cheap that you end up throwing away, or even worse, have to pay for repairs and upkeep. When travelling, I think about the difference between a $200 and a $50 hotel room. They are for practical purposes both the same: a place to sleep and maybe take a shower, which is really all you need. A lot of people spend money just because they have it laying around. Sports cars, motorboats, mansions, etc. These are all unnecessary and very expensive. Even if you can afford them, they will eat into your savings and severely lengthen your retirement horizon. I would ask myself, "is it worth working years extra in order to have this luxury now?" Possessions like cars and motorboats depreciate quickly and have almost no investment value. A house can at least be treated as an investment and sold (in a good market) to get your money back. My lifestyle is such that the hobbies I gravitate towards are relatively inexpensive, such as outdoor activities like cycling, skiing, backpacking. There is an equipment cost to these activities, but it's relatively cheap given the hours and amount of activity spent using the equipment. Being in the outdoors is mostly free.

I didn't have children

Children are wonderful, and I have much respect for those who choose to have them. However the fact is that they are a big drain on finances. Choosing not to have children made early retirement much more attainable.

Saving is not enough. I also invested.

Savings were put away into a diverse variety of investments that were designed to grow over time, ideally faster than inflation or fixed interest savings accounts. If I had kept my savings in low interest savings accounts because of market fears, then the retirement horizon would significantly increase. Because of inflation, the value of cash savings is likely to go down each year. I'm no professional financial planner, but I found plenty of resources to help decide on how to allocate into different investment types. I always maxed out the retirement plan offered by my employer, and for the rest I used mutual funds that represented a diverse mix of stocks. Historically, stocks have yielded the best return over time. Retiring at 40, there is still plenty of time for a post retirement long term investment plan.

Making a Plan

An important aspect of retirement planning is to get accurate data about what is possible. To understand when you could retire, and what it would take to get there, you need data. You need to have a good estimate of how much money you will need (and want) to spend each year for the rest of your life. How long do you think you will live? There are critical expenses, such as living costs and health care. And then there are optional things like travel budget, hobbies, etc. For this, I found it useful to track what I was spending each year on these things before retirement, then add some more to account for the rising cost of health care as I aged, and the fact that I might spend more money if I had more free time. I chose to gather my spending information using automatic tools such as and, with which I was able to get a comprehensive overview of my finances and my progression towards retirement.

Once you have figured out how much you need to spend in retirement, you can use any number of "retirement calculators" available online to figure out what needs to happen and how long it would take to get to your retirement goal. These calculators should factor in the amount you are saving each year before retirement, what types of investments you are making, your current net worth and investment allocation, how long you will live, how much you plan to spend each year, social security, etc. I found it useful to tweak the inputs and see what changed. What is the effect of saving 1000 more each year? What is the effect of spending 1000 less each year after retirement? What if social security never comes through? I recommend using several different retirement calculators and compare the results. The good calculators will give you the probabilities of different outcomes. As you save and invest, and as the market changes over time, check the calculators periodically and see how you are progressing towards your goal.

That's it

That is pretty much it. I got lucky, made a plan, saved a lot, and invested it. It is important to note that there are no guarantees. No one can predict the future with 100% certainty. Perhaps my good luck will not last. There is still a chance my retirement plans could come crashing down and I could lose it all, but I understand the risk. And it isn't as risky as you might think. In the event of some retirement-draining financial catastrophe, there are no children to worry about, and I am young enough to likely get back into the job market. In the meantime, I get to live a comfortable, but not extravagant, work-free lifestyle doing the things I want to do.