This is my road map to retire by 40. Everyone’s situation is unique and I can only tell you what I’ve done so far. To retire early, you need to build up a big war chest and that’s what I’ve been doing in phase 1 of my plan (20 -40 years old.) I have been working in the tech industry for about 15 years and I took advantage of every form of savings and incentives my employers offered. Here are what I’ve done so far.
1. Luckily Picked The Right Partner
The right partnership helps each other work toward the same financial goal. It could be paying off debt or retirement or saving for a house. If both people work together and support each other through hard times, then the journey is so much easier. The Mrs. is great at saving and both of us can handle delayed gratification and we make a great team.
2. Get rid of Consumer Debt
We never carry any credit card balance and we haven’t had a car loan in over 4 years. We started with 0 baseline when we graduated from college and never started accumulating debts like so many people did. Thanks to our parents, neither one of us had any student loans. If you’re in debt, you need to get to 0 net worth as soon as you can.
3. Spend Less Than We Make
We always spend less than we made and that’s the key to building wealth. No matter how much money you make, you can spend it all and then some. It is very important to grow your income, but good defense almost always beat good offense (read The Millionaire Next Door.) If you don’t have a budget, make one now. There are many resources on the internet. Check out my detailed post.
4. Emergency Fund
We keep 3 months of living expenses in the savings account. This enables us to weather most emergencies. The last emergency we had was when our old car completely broke down in the middle of a busy intersection. We have the emergency fund and then saved up for 3 more months, and we could purchase a replacement vehicle with cash.
5. 401k
I started contributing to my 401k since my first paycheck. After a few years, I maxed out contribution and have been maxing out ever since. The Mrs. also maxed out every year she worked. She took a few years off to serve in the Peace Corps. and a few more years to get her graduate degree, but other than that, she always contributed to her 401k plan. The 401k is a great investment vehicle and everyone should take advantage of this.
6. Roth IRA
We maxed out our Roth IRA contribution when we were eligible. The Roth IRA will help balance our tax burden when we withdraw from the retirement portfolio.
7. Stock Participation Plan
I maxed out on my company stock participation plan. I get at least a 15% discount so this plan worked pretty well for me. I try to keep company stock to about 5% of my portfolio so I don’t have all my eggs in one basket.
#5,6,7 are especially important because all these come out of my paycheck before I see the money. This helps keep our lifestyle inflation down and compounds our investment. Some of these investments didn’t do that great, but if I had the money in my pocket I would have spent it instead of saving it.
8. Real Estate investment
We purchased a modest home in 2000 with a 15-year fixed mortgage. This was a great move and the home appreciated in value over the last 10 years. We moved to a new place in 2007 and rented the home out. This started us down the real estate investment path. Now we have another rental condo and I’m working on getting a 4-plex. A rental property is also a good hedge against inflation because the rent goes up with inflation and the mortgage loan is worth less.
9. Discount Brokerage Account
We had a brokerage account since I started working and I kept adding to this account with any extra money left. I can purchase any type of investment I want in this account and I use it to balance my asset allocation.
10. Start early
We started investing early and never stopped contributing to all the accounts. We had two huge bear markets since I started working, but we persevered and kept investing through those markets. In 2011, our portfolio is doing pretty well and I am close to my retire by 40 goals.
These are the things that I’ve done to build up my war chest. The next part of the plan is to figure out how to quit the corporate job and keep this war chest locked until I’m in my 60s (phase 2.) See the rest of my Exit Strategy on my About Page. I’ll keep everyone updated as the plan unfolds. 🙂 You can see my Financial Goals at 40 here. If you have any suggestions for my last 3 years in phase 1, please share.
Here is a nice chart for those of you who are more visual.
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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I retired at 26. I spent as little as possible. I still continued to buy houses. It took another 6-7 years before I could spend more than the average person. Now I’m 38 and well ahead of the average. I invested in single family houses. I think you should quit your job and focus your attention on your best return investments that require little work, but allow you complete control. Quit now! Do the math. Dip into 401k if you must. You will not regret it. Like you said, real estate will always pay. You won’t have to worry about inflation from 40-60. Pull the trigger!
This is a great plan you’ve got there RBF and I love the infographic you put together to illustrate exactly how your saving strategy works. Very impressive!
Thanks for the complement!
Great visual RB40. It always helps to have a visual of your goals. I’m curious if the market downturn, although it looks like it has recovered nicely recently, has impacted your plan? Are you changing your investment mix or are you staying with your plan?
No, I’m still going ahead with my early retirement plan. I’m not planning to draw on the investment until we hit our 60s so we still have a lot of time to recover. We are diversifying with some rental properties. You can read about the 4plex we just closed here. https://retireby40.org/2011/09/4-plex-investment/
Ok retire by 40 I am 22 considering what I have in investments my Roth and Student Loans I have a net worth around (15000) It will decrease further as I finish my masters in accounting (CPA route). However I would like to retire by forty too. Any advice?
You know what you’re doing RB40, I’ll give you that. Not many people have it all planned out including me! Great post.
I know everyone is patting you on the back and saying good job but I don’t get the plan. If you want to retire at 40 why are focusing so much on qualified accounts that you shouldn’t touch till 59.5 (unless you are going to look into 72t/72q distributions).
Take the 16,500 that you are probably dropping into the 401(k) and use it to purchase a stream of income when you are 40 years and 1 day…not when you are 59.5? Use it to pay down rental property, build a business, buy a fixed annuity, etc.
Not trying to be harsh it, but to do anything else just doesn’t make sense to me.
I want to focus on the retirement accounts because I want to let it compound. We are pretty frugal and I think it will be pretty easy to work just enough to pay the bill. So at 40, we will probably stop contributing to retirement account and work just enough.
We are working on alternative stream of income for the 40 + 1 day also. I’m working on getting a 4 plex and another additional goal is to have at least 150k liquid to build business/invest in dividend income. So I am working on both retirement accounts and income stream at the same time.
The bottom line is we want to be able to have a relax retirement. From 40 to 60, I can always pay the bill by taking a job if I really need to.
Wow excellent chart! I wish I had those mad computer skills 🙂
Great instructions on how to retire early. I want to retire early too- I want to be able to raise my kids and go on vacation with them during summers and take my time cooking 🙂
Thanks!
Who wants to be a corporate slave forever? 😀
I like your post. I’m trying to retire as early as possible. I contribute a lot of my companies 401k plan and have a roth IRA. I started this as early as possible.
Do you plan on working part time once you retire? Or do you have hobbies that you are going to take up?
I’m planning to work part time when I hit 40. I’m planning to take a year or two off to figure out what I can do. The Mrs. and the rental income will have to pick up the bills meanwhile.
Great advice for anyone, no matter when they want to retire. I advocate building as much wealth as possible when you are young, much more time to let compound interest (return) work its magic. (Even if you don’t want to retire early)
I agree 100%.
Where is the “… and a miracle happens…” or the ever popular “… it rains money…” step?!?! Good God man, update your plan!
Ooops, I forgot to add buy lotto to my chart. I’ll work on the next version. 😀
I’m already 40 – well, 41 actually!
Your post is really inspiring and I’m wondering what I could do to retire by 50. A lot of people here (I’m in the UK) struggle to retire by 65. I really don’t want to be in that position.
My problem is that I don’t want to sacrifice my quality of life now (I only work part-time so as to have more time to spend with my elderly parents and do volunteer work) in order to earn more money to save for my retirement. Perhaps I need to learn to be more frugal.
Hi JenP,
You need to save and invest aggressively if you only have 10 years to do it. Maybe get into real estate and look into rental properties?
Be more frugal will definitely help.
So if you are still working (even for fun), are you retired?
I’m not going to completely stop working once I hit 40. I’ll figure something out.
I definitely wouldn’t do something that’s not fun.
Yeap, stress is a big part of what make work a job.
I still have to work a bit after 40, but hopefully just part time and only things that I like to do. Blog and other ventures.
Rental investment will have to pick up the slack. The Mrs. will still work.
How much liquid cash do you estimate you will have when you reach 40 since you can’t touch your 401K until 59.5?
Not a lot, I’m estimating 200k if I’m lucky. Most everything else will be tied down in retirement accounts and real estate investments.
As long as cash flow is positive, I think we’ll be OK.
RB40, I like your graphics. It’s a great visual reminder. Do you keep it posted anywhere as a motivational tool?
Yes, on this blog. 😀
That’s a good idea, I should print it out and stick it on the wall!
That’s an impressive plan! For additional income would you and the Mrs. consider jumping into a better paying job or a company that has 401k matching? That’s the only thing I can think of as your plan looks very solid! 🙂
We do have 401k matching at both our jobs. I didn’t put it on the chart. Maybe I’ll try to put that in the next version.
Thanks Buck!
Great chart. Just writing it all out gave us relief and motivation. Now that you are several years into your plan, I would imagine it only gets easier, as your resolve gets stronger that you are indeed on the right path!
Cheers
Definitely. It’s been proven that written goals have a much higher chance of being achieved. What better place to write them down than on the internet. 🙂
Looks like a good start! The intangible is what do you do when you achieve your goal. Believe me that is the hard part. Keep it up.
I need to get in touch with you offline to learn from your experience. What issues have you seen after you achieve your goals?
I think you created the perfect plan. In parallel, I too followed such a plan, but with 1 missing important ingredient… my wife become a stay at home mom when my son was born 10 years ago. While we don’t regret the move, it did set us back…
Great chart and excellent instruction on how to retire early!!!
We put off having a baby until now so we’ve been working since we finished school. My wife likes to work, it gives her purpose and she enjoy the working environment. I will try to be a stay at home dad soon. 🙂
Great! I missed out on “start early” part due to living somewhere else and not in the US (different retirement system there). Still working on #2 and 4 (well and all the rest except #1 :-)). I might adopt your road map, I think! 🙂
Starting early is great, but it’s never too late. Just by starting to save, you’re already ahead of so many people. It might take a while, but you’ll get there. 😉
Good tips, Joe. I think that #3 (spend less than we make) and #10 (start early) are the foundational tips that help start the snowball of savings and accumulation. The other tactics are valuable as well, of course.
Cool flowchart. I think it’s good to do these sometimes, as visualizing the flow of money can help us better understand where our money is going (or how it’s coming in).
Thanks! I like the flowchart too. I’m more of a visual person and it’s a good reminder.
Do you have an early retirement target too? Kevin’s target is 35 and I think we’re both past that point. 🙂
Great summary roundup. I hope to be out of the rat race by 35 or earlier, myself, but realistically even 40 would be a nice time.
35 is very ambitious. 🙂
Sounds great Kevin.
Wow!!! You really have done a very good job in building the solid base over which you can rally. Well done. I’m sure it took a lot of sacrifices along the way, but considering your first point, you’ve had a good support from your partner!
I think your best asset is having such clarity regarding your finances and your goals. That’s what has kept you focused and on the right track. Good luck on the last 3 years of step 1!!!
Thanks! It took a while for the vision to come together, but I started saving since my first pay check thanks to my dad’s advice. That gave me a huge head start and I kept expanding our investments.
So it all comes back to financial education and receiving it at an early age… good for your dad (for sharing this kind of advice) and you (for taking it at such an early age)!!!
Nice! I love the flowchart! What do you use to create them?
I used Visio to make the chart.
Do you have a note somewhere on your final retirement # and how long you think it will last ??
Here are my goals when I get to 40.
https://retireby40.org/2010/12/retirebyfortys-goals-exit-strategy/
After 40, the goal will be to not touch our nest egg until we’re in our 60s.
From 40 to 60s, we’ll do just enough to get by and probably won’t add to the nest egg much.
If all goes according to plan, by the time we hit 60s, the nest egg show grow quite a bit.
Great chart Joe! It’s great to have a visual like this to understand expenses and investments! I feel like my wife and I are doing great. We’ve nearly payed off our student loans, we’ve just started contributing into our 401(k), and we’re considering making a house purchase very soon (within a year or so). We’ll also beef up our emergency fund to $10,000 or so from the $2,000 we have now. Of course, everything won’t go according to plan, but at least we have a plan and can course correct if we need to! It’s better than randomly spending money on things that will not benefit our future, right?
Derek, you are so far ahead of the typical 20 something. You’re right that it won’t all goes according to the plan, but at least we know we’re heading in the right direction.