Yes, I know the title of the blog is Retire By 40. However, many of our readers are in their 40s and 50s and they are planning to retire soon. You don’t have to be under 40 to read this blog. Maybe I should rename the blog to Retire between 40 and 55. 🙂
Being in your 40s is a bit strange. I don’t feel young anymore, but I don’t feel old either, except when I’m trying to keep up with our energizer bunny son. Life should be a little smoother at this point. The 20s and 30s can be very hectic as we try to figure out career, family, and money. Hopefully, our 40s will be a little more calm and we can just stay the course. All this is assuming you’ve got it figured out, of course. If you’re still struggling with money and life in your 40s, then you might need to get some professional help.
I’m trying to figure out how I should prioritize our finance over the next decade and I thought this would be useful to many of our readers too. As I alluded to above, we won’t have to make many big changes in this decade of our lives. Here are the 5 things I’ll be working on in my 40s.
1) Minimize Lifestyle Inflation
It’s so easy to spend more money in your 40s. We’re not starving students anymore and we have grown accustomed to a more comfortable lifestyle. Most people will enter their peak earning period in their 40s and it’s natural to spend more money at this point in our lives. It takes a lot of money to maintain a house, kids, cars, social life, and entertain ourselves. However, you’re not young anymore and you need to seriously plan your retirement.
Retirement can last 30+ years these days. In my case, I’ll be in semi-retirement for 20 years and then full retirement for another 20+ years. If you minimize lifestyle inflation, then you’ll have more money to put toward retirement. Over the last few years, we saved over $50,000 per year in our tax advantaged accounts, so we just need to focus on minimizing lifestyle inflation. If we can keep lifestyle inflation down, then we will continue to save and we’ll be in a great financial position in 15 years.
2) Increase income
It’s easy to increase your income when you’re in your 20s. I got a 20% raise one year and it was fantastic. I think most of us probably are in a comfortable spot in our 40s and it will be difficult to increase our income much year over year.
For us, I’m hoping to at least beat inflation every year. Mrs. RB40 is still working and hopefully she’ll see a little raise annually. She is still making good progress in her career so she will probably get one or two promotion this decade. My online income on the other hand can be up and down. It will be tough to increase it much unless I invest a lot more time and money into the business. I think when RB40 junior starts school full time, then I’ll be able to focus better and try to earn more money online.
Also, don’t forget passive income. Invest all the extra money you can and get your passive income streams rolling. Here are our plans for passive income.
- Dividend income – Grow dividend income through additional investment, dividend reinvestment, and dividend growth. I’m not exactly sure how much we can grow each year. I’m hoping for at least 8% growth annually. I’ll do some calculation and write a detailed post about the last 2 years for us.
- Rentals – Theoretically, this one should be easy. Rent is increasing and more money goes toward the principle in our mortgages every month. However, repair and maintenance can get expensive too. The rental income growth is difficult to measure year over year because every year is different. In the long term, the rentals should increase our net worth significantly.
- P2P lending – I’m not sure about this one. I’m going to start moving some money to our dividend portfolio. This will help simplify my life a bit.
- Other residual income – Unfortunately, I don’t have more residual income right now. Maybe I can create a product or write a book to generate more passive income. Again, I’d need a lot of time to do this.
All these should be enough to surpass the inflation rate. We’ll have some up and down years, but our income should be grow steadily in our 40s.
3) Reduce debt
Personally, I think everyone should pay off all their debt before they fully retire. High interest consumer debt in particular will sabotage your retirement saving. You need to get rid of those first and then work on mortgages and other low interest rate debts.
I hope to pay off the mortgage on our primary residence before we turn 50. That will decrease our monthly expense and enable us to splurge a bit more. I’m ambivalent about the mortgages for the rentals. As long as they are making a little money, I don’t really care about owing some money there.
4) Protect your loved ones
If you have a family or dependents, it’s extremely important to make sure they are protected in case something happens. You need life insurance and a will. I got term life insurance after I left my old job so I just have to make sure there are at least $25 in the checking account every month. Here is the checklist if you have dependents.
- Get life insurance and make sure to pay the premium every month.
- Make a will and update it whenever there is a significant life change.
- Make a Trust to minimize estate tax.
- Make sure all your accounts have the correct beneficiaries.
- General durable power of attorney, medical power of attorney, and living will? What the heck are these? I guess I need to figure them out.
5) Define your own retirement
As mentioned earlier, you’re not young anymore and retirement is on the horizon. Many of us will have fewer working years ahead of us than behind. Thanks goodness! At this point, you need to figure out if you want a regular retirement or something else. Since you’re here with me this far, I will assume you’re working toward early retirement. You need to make sure you can survive without a day job, but you don’t have to be completely financial independence to leave your corporate career. You just need to be creative and figure out how to make some income to cover the shortfall.
It’s even more important is to figure out what you’ll do after “retirement.” I’m in a unique position here at Retire By 40 because I’ve met quite a few people who left their day jobs. The fact is that none of them are sitting around the pool and playing golf all day. Early retirees have a lust for life and we love having the freedom to do whatever we want with our days. Whether that’s part time work, traveling, raising the kids, or something else, it’s best that you make some kind of plan before quitting your corporate job. The idle retirement isn’t the right fit for most of us who retire early.
The best decade is ahead
The 40s will be the best 10 years of our lives here at the RB40 household. We are in the groove financially and our family life is stable. Of course, there will be changes, but I’m sure we’ll make the best of them. Our kid will go to full time kindergarten in less than 2 years and I’ll need to redefine my role again. I’ll have more time for self employment or just self improvement. Maybe I’ll decide to take it easy for a couple of years and reconnect with my spiritual side. Who knows… Life is flexible so you just have to embrace the challenges as you go along.
What do you think of my plan? What’s your plan for your 40s? I’d love some advice from older folks who successfully got through their 40s.
Photo credit: flickr by Pickersgill Reef
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.