Early retirement is a dream for many workers, but retiring early is an extreme goal even for dedicated savers. You already know you can retire at 40 if you win the lottery, but you might be able to leave work behind even without that large one-time windfall. There is no one hard-and-fast number that is "enough" to retire on. Instead, the amount you need to live comfortably for the rest of your life depends on factors such as your spending habits, your investing style and your ability to earn some extra income if you need to.
50 Year Retirement
Retirement experts and financial planners often advise their clients to withdraw no more than 4 to 5 percent of their nest eggs during the first year of retirement, but that advice generally applies to those who plan to retire at 60 or 65, not 40. A person who retires at 60 or 65 can expect to spend perhaps 30 years living in retirement, but if you retire at 40 you are looking at a retirement that could last 50 years or longer. Withdrawing that recommended 4 to 5 percent could mean running out of money long before you run out of life.
For that reason, retiring at 40 requires scaling back those withdrawals significantly, taking out between 2 and 3 percent instead of 4 or 5. That means that a nest egg of a million dollars would generate only $20,000 to $30,000 in income. You can look for higher yielding investments of course, but it is important to avoid taking too much risk. Maintaining a balanced portfolio is critical too. You will need some exposure to stocks, perhaps as much as 50 percent of your portfolio, to keep ahead of inflation over your 50 year retirement.
Health Insurance Concerns
You will need less to retire at 40 if you have access to an affordable health care plan. It is much easier to retire at 40 if you have fully funded health insurance for life from a former employer. Be sure to factor the cost of health care spending into your retirement budget and your decision making process.
Chances are you will not want to spend your entire retirement doing nothing, and sooner or later you might need to return to work for either personal or financial reasons. If you have marketable skills, you might be able to earn a high hourly rate, and that means working fewer hours to get the extra spending money you need. Keeping your skills up to date is always a good idea, whether you plan to retire at 40, 50, 60 or 70.
Your chances of retiring early on less than a princely sum go up significantly if you are used to living a frugal lifestyle and willing to continue your penny pinching ways in retirement. If you are the type of person who simply must keep up with the Joneses, your best shot at retiring early might be a winning lottery ticket. But if you are used to living beneath your means and saving the excess, you might be able to make an early retirement work, even retiring by age 40.