How Much Do You Have to Save to Retire Early?

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?

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.

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.

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.

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.

Published by

Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

6 thoughts on “How Much Do You Have to Save to Retire Early?

  1. Quit throwing water on my dreams!

    Just kidding. I feel like this post was maybe the very first that I’ve read, that took a specific look at what it takes to retire early. I may need to chat with you about our specific plan someday. For now the plan is just to keep throwing money at our investments and save more. The actual execution of our plan is a little too high level to feel confident about:

  2. Fun with numbers…but I think the future will be so significantly different than the last 40 years, we cannot just use financial projections with much of any confidence.

    1. Perhaps, and perhaps doing these numbers creates an anchoring effect, but having a plan is better than having no plan at all. It’s easier to adjust your actions if the some of the assumptions in a plan change than to try to start a plan 10 years down the road.

  3. The bear in the room is that you can’t really save money and watch it grow in the bank over time, like we used to be able to do, before the Fed cut interest rates to near zero. And kept them there.

    If you ‘save’ money, it loses value to inflation. That forces would-be savers to invest in the stock market or other investment vehicles. None of which are safe and stable.

    1. Hi Tom – Thanks for commenting!

      Investments never were safe and stable. That’s the paradox: you have to assume that your investments will beat inflation, which, given a long enough timespan, is a likely outcome; however, if you’re trying to retire early, then you don’t have as much time for the market to recover when it’s not beating inflation (see: S&P 500, January 2014). Our economy is different from, say, China, where there’s an enormous personal savings rate.

      You can either have a low expense to income ratio and get there by brute force or you will have to take shots with your investments. Neither is easy. The former is more likely to work than the latter, but if the latter works, you could get there earlier, as we did.

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