How Much Do You Have to Save to Retire Early?

Piggy bank

Fatten him up!

“The best time to start thinking about retirement is before your boss does.”

When I was in the Army, I had the option of staying in – assuming they didn’t kick me out at some point – for 20 years and then retiring. Had I stayed in, I’d have less than 2 years left until I could retire. While the military retirement paycheck wouldn’t have been large, with some wise investing and smart saving, I could have probably retired and never worked again. It’s not impossible; my friend Doug Nordman did it, and a classmate of mine from the Officer Basic Course who had previously been enlisted retired and lives in a fifth wheel with his two huskies.

Because of that possibility, I’ve had an anchor in my mind for a long time that I should be able to retire at age 42 if I wanted to. I didn’t necessarily have to retire, in my mind, to be successful, although I certainly didn’t want to work mindlessly for the rest of my life, either.

For many people, age 40 supposedly defines the midlife crisis year. I didn’t notice a Mr. Reaper knocking on the door when my 40th birthday came, but for some, the age of 40 is quite a big deal.

What if you wanted to aim to turn in your resignation letter on your 40th birthday and never work again? What would it take?

To answer this question, I looked at a 22 year old couple who would work until age 40 and then retire.

First off, let me explain why it’s harder for a 40 year old to retire than a sixtysomething:

  • Can’t access retirement funds. As I discussed in “How Do You Bridge the Gap Between Early Retirement and Age 59 ½?”, the IRS doesn’t want you tapping into your 401k and IRA funds until you’re a designated retirement age, between 55 and 59 ½, depending on the type of account. Until then, you have to live off of non-retirement funds, with a few exceptions.
  • Lower Social Security payments. Not only do you have to live without Social Security payments for between 22 and 30 years, depending on when you want to claim, but, since Social Security counts your earnings for 35 years, you’ll end up with a hefty haircut on the amount of Social Security you receive. You will probably have put in less, so you’ll get less in return.
  • More years to cover with your investments. Since you’ll be retired at an early age, you’ll need more money in the first place, since it will have to last you a long time. While there are no studies about early retirees and life expectancy like the ones for people who were forced to retire, I suspect that early retirees are, in general, more affluent, and therefore, they are healthier and will have a longer life expectancy.

In evaluating this couple, I took three approaches to answering the question of what it would take to retire at age 40. I created a Monte Carlo simulation, meaning that I evaluated 10,000 possible random outcomes given a set of parameters about inflation and the market (explained at the end of the article) to model out increases in expenses, income (except where discussed), and investment returns. I defined success as still having money after age 95, 55 years of retirement.

Just what does it take to retire at age 40?

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Approach #1: Save More

In this case, our couple started out earning $50,000 per year. They saved a percentage of their income. Each year, their income increased in line with inflation, and so did their spending, except for adjustments in the 70s and 80s in line with age-based spending decreases.

Savings Rate Affect on Early Retirement Success Rates by Fort Worth Financial Planner Hull Financial Planning

When I make financial plan recommendations, I like to see a 90% success rate. In this case, the couple needed to save about 61% of their income in order to get to the 90% success rate.

While I know people who live off of 50% of their income (see “Five Ways Living on One Paycheck Provides Flexibility for Your Family” for examples), I think it would be tricky for the average couple to live on an inflation adjusted amount of under $20k per year.

I am not saying it’s impossible to hit this target, but it’s very difficult.

Are there other ways to get there?

Approach #2: Annual increases in income

Rather than having the couple only get raises based on inflation, I looked at a situation where they got different increases in income each year.

They started off earning $50,000 per year, but this time, they lived on the Len Penzo magic $40,000 expense number, which increased with inflation each year. Instead of both income and expenses being tied to inflation, only expenses were tied to inflation.

Increase in Income Affect on Early Retirement Success Rates by Fort Worth Financial Planner Hull Financial Planning

This time, the couple needed a little over a 12% annual income increase to get to the 90% threshold. That would mean progressing from $50,000 per year at age 22 to $343,302 at age 39. Again, it’s not impossible, but it’s improbable. To compare, a 10% annual income increase means earning $252,724 per year at age 39 – much more attainable.

There was one more factor that this couple could affect to help reach their goal.

Approach #3: Increase the starting salary

Shrewd negotiators (or dual income couples) can increase the starting number. Previous salary becomes an anchor for new salaries, as very few people take pay cuts unless they’re either changing careers or significantly underperforming. Thus, what you make in the beginning can have a drastic impact on how much you earn later on.

In this scenario, I looked at different starting salaries and then had those salaries increase by inflation. The couple started off again at the magic Len Penzo $40k expense level, which also increased annually by inflation.

Affect of Starting Salary on Early Retirement Success by Fort Worth Financial Planner Hull Financial Planning

In this scenario, the couple never quite got to the desired 90% threshold; at $100,000 in starting salary (which would be $50k each), the success rate was 87.2%. Interestingly, median net worth after age 95 only turned positive at $75,000 starting salary.


You probably already knew this, but having enough money by age 40 to successfully retire and live without working through age 95 is not easy. You cannot live a normal life doing what everyone else does and expect to retire early. It will take a combination of higher income, greater savings rates, and staying off the hedonic treadmill and keeping your expenses in check in order for you to get there.

However, if being out of the workforce early is what your mental retirement picture is, then it’s possible to achieve with hard work, wise decisions, and a little luck.

Is early retirement in your plans? Are you prepared to put in the hard work necessary to get there? Let’s talk about it in the comments below!

Assumptions used in this article

  • Equity market returns based on betapert distribution of historical S&P 500 returns since 1871
  • Treasury returns based on betapert distribution of historical 10 year bond returns since 1926
  • Inflation based on betapert distribution of historical inflation since 1926
  • Asset allocation based on 110 – age distribution except for ages 40-44, with a 20% equity/80% bond distribution (see “Asset Allocation for Early Retirees” for more)
  • Spending patterns based on proprietary model of elderly spending behavior
  • Couple claims Social Security at full retirement age: 67
  • These returns are for demonstration purposes only. There are no guarantees of investment returns.

About Jason Hull, CFP®

Jason Hull, CFP®, is the Chief Technology officer of myFinancialAnswers, an online comprehensive financial planning service.