Updated August 14, 2023

Want to Retire by 40? Here’s How Much You’ll Need to Save.

According to a recent Gallup poll, the age when Americans expect to retire is creeping up — from 62 in 2002 to 66 in 2022. If the mere thought of working that long makes you shudder, don’t worry; there’s hope. And it’s spelled F-I-R-E. 

Financial Independence, Retire Early (FIRE) is a philosophy popularized in the early 90s. It was then rediscovered by high-net-worth Millennials roughly a decade ago and has since only grown in popularity as FIRE-focused influencers introduce the lifestyle to a new and growing “early retirement curious” audience. 

The concept of FIRE is one of extreme frugality to create an early retirement nest egg. Instead of the 10% to 15% in annual retirement savings recommended by most financial planners, FIRE adherents save 50% to 75% of their yearly income. Here’s how these strategies compare:

Saving 10% annually, it takes nine years to accrue one year of living expenses.

Saving 50% annually, it takes one year to accrue one year of living expenses.

Saving 75% annually, it takes four months to accrue one year of living expenses.

The Rule of 25

The Rule of 25, a core tenet of FIRE, says you must save 25 times your annual expenses before considering retirement.

Monthly expenses x 12 = annual living expense x 25 = your target FIRE number

If your monthly expenses are $5,000, you’ll multiply that by 12 to get an annual living expense of $60,000. Multiply that by 25, and you’ll have a target FIRE number of $1.5M. This is the minimum you’ll need to retire early.

Those who can save 75% of their annual salary should accumulate what they need according to the Rule of 25 in less than ten years. So, if you’re in your 20s or early 30s, it’s entirely possible you could retire by 40.

What’s Your Ideal Version of Retirement? 

Because saving 75% of one’s salary can be too big a burden for some, there are three classifications of FIRE based on how you imagine your post-retirement financial lifestyle:

Fat FIRE is for a retirement where you won’t have to skimp—envision yourself living your best life after early retirement. It’s for the 75% percenters making sacrifices today so they won’t have to make as many later in life.  

Lean FIRE is more of a minimalist approach—think early retirement, but with disciplined spending and frugality. It’s for those who are able to save roughly 50% now in exchange for a modest yet satisfying life free from work. 

Barista FIRE is a bit of a hedge. It’s for someone who wants to retire from full-time work at a younger age but is OK having a part-time job with medical benefits (like those offered by Starbucks). Barista FIRE retirees can leave the workforce before they’ve banked a million dollars because they can count on roughly $30,000 in salary and side hustles to help stretch their savings.

Is The 4% Rule Adequate for Early Retirement? 

The 4% Rule is another key rule of thumb for anyone planning for retirement. It provides guidance on what retirees should target in terms of annual withdrawals. Proponents of FIRE suggest that retirees withdraw 4% of their savings in the first year and adjust for inflation in future years as necessary. 

Using our target FIRE number of $1.5M as an example, with the rule of 4%, you could withdraw $60,000 in your first year of retirement.

Former Fed economist Karsten Jeske feels 4% is a tad high, however, and suggests withdrawing funds from your retirement savings account at a rate of 3.5% or less. Jeske believes smaller annual withdrawals will give most retirees adequate cash reserves for a retirement that could extend past the fifty-year mark.

A Word of Caution

The reason most wait until their mid-to-late 60s to retire is entirely pragmatic: full Medicare and Social Security benefits aren’t available until ages 65 and 67, respectively. Those who retire as early as 40 will have to contend with the high cost of health care insurance and medical care. 

As a safeguard against this, Jeske — who’s clearly a pragmatist — advocates for saving 30 to 40 times your annual expenses (think a Rule of 30 or 40 vs. 25). For those with $60,000 in annual expenses, that could mean needing between $1.8M and $2.4M in savings before retirement is possible.

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