When it comes to retirement, it’s never too soon to start planning and saving. According to a 2017 Merrill Lynch study, the average retirement costs $738,400. Another study, from the Employee Benefit Research Institute, found that 34% of Americans think they’ll need at least $1 million to enjoy a comfortable retirement.

If you plan to retire at what Social Security calls your "normal "retirement age—typically 66 or 67 for most people these days—you could have several decades to save. If you’ve set a goal to retire by 40, on the other hand, you're going to have to save far more aggressively. But that doesn’t mean you can’t do it. Here are some ideas.

Key Takeaways

  • It's possible to retire by 40, but it takes a lot of planning (and aggressive saving) to do it.
  • Start by running the numbers to find out how much money you'd need to save each month to retire early—and then decide if that’s feasible.
  • If your savings target seems out of reach, look for ways to spend less and earn more now, or adjust your expectations for retirement. Or both.

Envision Your Ideal Retirement

Retirement means something different to just about everyone. If you plan to retire by 40, you need to think about how you’re going to spend the next as-many-as four decades after that, assuming you have a relatively normal life expectancy.

Do you plan to travel part of the year, for example, or become a full-time nomad? How will your day-to-day spending habits change? Will any of your expenses go up or down? Will you still work part-time? Do you have plans to launch a business? Do you want to volunteer or start your own nonprofit?

Once you’ve thought it through and come up with a ballpark budget for how much money you expect to spend in retirement, you can dig into the other side of the equation—how much you'll need to save to make it happen.

Set a Savings Goal

Nailing down a savings goal is difficult enough under normal circumstances. But it’s considerably more so if you want to retire early. One rule of thumb recommends multiplying your desired annual income in retirement by 25 to come up with a savings goal. So, if you want to have $50,000 a year for 25 years, you’d need $1.25 million. But that assumes you retire at a relatively conventional age. If you’re looking at an extra 20 years in retirement, you’d need more like $2.25 million instead.

Of course, you may be able to set the numbers a little lower if you’ll have money coming in from a side hustle or a business in retirement. Also, take a second look at your budget to see if you can get by with less income each year (that’s one reason some people retire abroad). And be sure you factor in Social Security payments once you reach your 60s. You'll need to have paid into the system for at least 40 quarters, or 10 years, to qualify.

Estimate Your Savings Growth

Once you have an idea of what your long-term goal is, look at how much you already have saved and how long you have until you turn 40. This gives you a framework for how much you'll need to save each year and each month to get there.

Let’s say you’re 25 years old, making $50,000 a year, you’re just beginning to save, and you want to accumulate $1 million. If you save half of your income each month ($2,083), you could have about $660,000 when you retire at 40. That could translate into about $1,222 a month in income over 45 years of retirement.

Keep in mind that this is an overly simplified example. It assumes a 7% annualized return for the 15 years before you retire, and then equal monthly withdrawals for the next 45 years.

That $1,222 month could be hard to live off of unless you’re willing to cut your lifestyle significantly. Of course, once you hit age 62, you may be eligible to start collecting Social Security benefits. (But bear in mind that they'll be substantially—and permanently—lower at age 62 than if you wait until later in your 60s, up to age 70, when benefits top out.) And if you have that side hustle or business in retirement, that income will help, too.

Consider Ways to Save More

Retiring on $1,222 a month might work if you have other sources of income. But you’ll probably need to aim higher if you want to have enough money to live on once you retire. If you need to save more, you’ve got two basic options:

  • Trim your expenses as much as possible. Getting a roommate or two, selling your car and using public transportation instead, or canceling your cable TV can reduce your outflow.
  • Work on increasing your income and investing the extra money. You could increase your hours at work or take on a part-time job to add to your cash flow.

Max out your 401(k) if you can, and if you have any money left over, consider a Roth IRA.

Choose the Right Savings Vehicles

If you’re saving on a shorter time frame, you need to be especially strategic about where you put your money. Your employer’s retirement plan, such as a 401(k), is an obvious choice, especially if your company gives you a matching contribution. Let’s say you make $50,000 a year and start saving at age 25. If you could manage to put $19,000 of your income (the 2019 maximum) into your 401(k), and your employer matched 100% of the first 6% of your contributions, by age 40, you’d have almost $550,000, assuming a 7% annual rate of return. (For 2020, the maximum is $19,500)

If saving that much of your income seems impossibly onerous, note that this calculation doesn't account for any raises you might receive between 25 and 40; if your salary does rise, a $19,000 contribution will be less of a burden.

That $550,000 is only about halfway to your $1 million goal (and bear in mind that you'll owe income tax on your withdrawals from a traditional 401(k) account). But if you have any spare income left, you could make up some of the difference by contributing to a Roth IRA. Using the 2019 annual contribution limit of $6,000 for anyone under 50 (unchanged in 2020), you could add another $147,000-and-change to your retirement nest egg, assuming a 7% annual return. In the case of a Roth IRA, your withdrawals will generally be tax-free if you're over age 59-1/2.

The bottom line when it comes to retiring by 40 is that you have to be proactive—and really good at deferred gratification. So run the numbers and take advantage of every opportunity to save (and earn). The sooner you start planning, the better your odds of retiring early with the money you'll need to enjoy it.