7 Steps to Retire by 40

Today’s post is on the subject of retirement, specifically the 7 steps to retire by 40. I’m happy to share the guest below from Amy Nickson.

Take it away Amy:

7 Steps to Retire by 40

According to the report of Smart Asset, the financial technology company, most of the people retire at the age of 63 in our nation. However, many people work till the age of 65 and unfortunately some never retire either by choice or to fulfill their necessity.

The stat is establishing the fact that early retirement is nothing but a rare stone. Working until the age of 65 is quite difficult, especially if the person has medical issues. Some people hate 9-5 work schedule and want to retire before their peers. But, monetary obligations and necessities lead them to work even in their retirement. Sad but true.

However, some people think in a different way and don’t consider the conventional retirement concept. They work hard to achieve financial freedom at their early age.

Below are some important steps that can help you achieve early retirement.

Have a look:

1. Be an early bird

People who have achieved early retirement accept that “the early bird catches the worm”. They suggest that one should start the journey early and with a proper plan to get financial freedom earlier.

As soon as you start earning, calculate how much money you will need in your retirement age. Remember, you must keep in mind that the cost of living will be higher in the future than what you’re currently paying.

So, it’s advisable to proceed with a budget from the very beginning. Budgeting helps you to understand how much money you can save.

The Fidelity Investment suggests that one should save 75% of income to achieve financial freedom earlier. However, the amount can vary depending on the lifestyle you’ll plan in your retirement.

But at least you should save 45% of your income to aspire your dream. Remember, to achieve your dream, you need to live within your means.

2. Curb your expenses ruthlessly

You have to be strict in regards to spending to get early retirement. You must challenge your expenses first to achieve your goal.

As per the experts, you need to have a big paycheck and fewer bills to get the desired result.

So, take a close look at your budget and cut all the expenses that are unnecessary. Track your spending in such a way that you can save 45% of your income every month.

Pauline Paquin, the founder of ReachFinancialIndependence.com said, “Every $100 you don’t spend today is a day you can live without having to work in early retirement,”

However, with time, you should increase the saving amount. You can either negotiate for a higher salary or seek a higher paying job. Considering side gigs can also boost your saving.

3. Stay away from financial obligations

You should stay away from all consumer debts in preparation for an early retirement. Incurring debts not only sabotage your financial freedom goal but also reduces cash flow and cuts the amount that you need to set aside for retirement.

Moreover, debt makes working-life longer. So, it’s better not to incur a pile of debt from the beginning of the financial journey.

4. Grow money through compound interest

Saving a major portion of income is not enough; you have to grow your money through compounding. Investing in mutual fund and stocks can be beneficial. You should have an investment portfolio with nearly 6.5 annual rates of return. As per the experts, the assets in your portfolio should have a growth rate that should be higher than the inflation rate.

5. Keep tax in mind while investing

You must invest in a tax efficient way. Investing in 401(k)s and IRAs help to grow money tax free. Eligibility and contribution limit are as follows:

Traditional 401(k)

  • Eligibility: 401(k) is a defined-contribution plan that is offered by your employer. The eligibility depends on the employer.

  • Contribution limit:
    Age 50 and below can contribute $18,000 in a year.
    Age 50-65 can contribute  $18,000 in a year + $6,000 catch-up provision per year.

Traditional IRA

  • Eligibility: Any people aged under 70 with taxable compensation is eligible.

  • Contribution limit:
    Age 50 and below can contribute $5,500 in a year.
    Age 50-65 can contribute $6,500 in a year.

6. Be thoughtful on your mortgage

Some experts suggest that it is a wiser option to pay off the mortgage before the retirement while other recommend that carrying the mortgage in retirement is not a bad idea if the rate is low and the person can afford the payments from guaranteed income sources in retirement.

However, you should use a mortgage calculator or seek professional help before taking out a mortgage to avoid any hassle in achieving early retirement.

7. Invest early and for longer period

“The early bird catches the worm” concept also applies in investing money.

Jim Wang of WalletHacks said, “assuming a standard 7 percent return, someone who invested $100 a month from age 20 to 30 would still end up with more money than someone who invested $100 a month from ages 30 to 60.”

However, it is also important to make the money grow over the decades rather than months or years.

Investment in indexing and asset allocation over decades can help to grow money significantly.

Finally, life has ups and downs. If you face any financial setbacks, then don’t get unfocused toward your long-term goal. Most of the people start well but lost interest in the  mid way.

Remember, everybody thinks achieving early retirement by 40 is difficult, but no one says it’s impossible. With the right strategy and effort, you can achieve financial freedom at the age of 40.

Let’s give it a chance.

Amy Nickson is a web enthusiast. She works for Oak View Law Group, a leading consumer and bankruptcy law firm based in CA and operational across US. She loves social media, as it gives her endless opportunities to reach out to a larger audience in a more unbiased way.

17 comments… add one
  • Financial Coach Brad Jan 11, 2017, 5:18 am

    As someone who retired at 44 I can say these are great tips for anyone who wants to retire early!

    • Amy Nickson Jan 13, 2017, 6:55 am

      Many thanks for stopping by. Yes, you’re right, planning for retirement is very important. The sooner the better.

  • Wes @ TPOHappiness Jan 11, 2017, 7:15 am

    One of my favorite sayings is “Early to bed, early to rise – makes a man healthy, wealthy, and wise.”
    It is especially entertaining to say it to my wife when she wants to sleep in. Though, of course she always says “It says MAN not WOMAN, let me sleep!”

    Thanks for the good list!

    • Amy Nickson Jan 13, 2017, 6:59 am

      Lol! You’re absolutely right.

      One should plan earlier to build up a decent nest egg!

  • Laurie @thefrugalfarmer Jan 11, 2017, 7:17 am

    People often overlook #2, but it’s SO easy to piddle away lots of money a little bit at a time. Analyze every single purchase before you make it. It all adds up!

    • Amy Nickson Jan 13, 2017, 7:04 am

      Laurie @thefrugalfarmer,

      I am glad that you liked my article.

      Yes, people often grab items without knowing it’s bad effect on their finances.

      Spending more than the income is one of the most crucial financial blunders.

  • Full Time Finance Jan 11, 2017, 7:42 am

    I think even if you don’t want to retire at forty these should be your targets. The last line especially, consistency is key. The financial independence later in life with give you choices.

    • Amy Nickson Jan 13, 2017, 7:11 am

      Full Time Finance, You ‘re absolutely right on your view.

      Achieving financial independence can open many doors for us.

  • The Grounded Engineer Jan 11, 2017, 7:48 am

    Great article write-up, Amy. One thing that is important to me, even though I have a goal to retire early, is having a “nice” home for my family and me to grow in. It is my only debt, and we plan to stay in the house for a long time. But, having the mortgage does hinder how much of our income we can save.

    • Amy Nickson Jan 13, 2017, 7:09 am

      The Grounded Engineer,

      Thanks for stopping by.

      You must consider a side hustle to boost your income. So many options are there. Just search online, you may find the best one.

      Wish you best of luck on your venture

  • Debbie Jan 11, 2017, 7:55 am

    4. 65 annual rates of return??? Does she mean 6.5%?

    • Amy Nickson Jan 13, 2017, 7:14 am

      HI Debbie,

      Thanks for stopping by,

      I didn’t get your query? I mentioned the age limit for the retirement contribution is 50-65.

      • Debbie Jan 13, 2017, 2:06 pm

        Amy, what I was questioning was the statement, under the 4th step, “investment portfolio with nearly 65 annual rates of return” I see that has now been changed to “6.5 annual rates of return” which I assume means 6.5% annual rates of return—

        • Amy Nickson Jan 16, 2017, 6:14 am

          Great observation Debbie, My apology for the typo.

          Yes, it should be 6.5% annual rates of return…

          I emailed Matt regarding this matter.

  • Financial Shaper Jan 11, 2017, 8:41 am

    Thanks for sharing these great tips and encouraging messages. The combination of an increased/increasing savings rate and the support of the compound effect is the key! And the sooner one starts, the better.

    • Amy Nickson Jan 13, 2017, 7:05 am

      Financial Shaper,

      Many thanks for appreciating my write up.

  • Steven Goodwin @ MyFamilyOnABudget Feb 2, 2017, 3:48 pm

    Hey Amy, nice seeing you over here! Some great tips you’ve come up with here! We are working to get our expenses down and are working to up our savings potential, but it can be hard at times! I think it boils down to freeing up as much of your biggest wealth building tool you have, your income, and using it in the smartest way possible to leverage more wealth! Have a great day!

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