How I Plan to Retire by Age 40 and Gain Financial Freedom

man watching sunrise from boulder
December 28, 2022

Retiring by age 40 may seem like a distant dream, but here I layout how I plan to retire and become financially independent by age 40.

Have you ever dreamt about retiring by age 40? Or within the next 10 years?

I for one want to be able to retire by age 40 by achieving financial independence. The idea of retiring by that age seems almost magical – like you would have all the time in the world to do absolutely anything your heart desires.

The possibilities of being retired by age 40 are incredible. Imagine being young and healthy and still being able to do whatever is on your bucket list. You could travel the world, sleep in every day, or even go join the local curling club (if that suits your fancy). 

If you have kids, you can stay home and play video games all day while they have to go to school. I wouldn’t recommend that but I’m just saying you could. 

I’ve recently come across the blog called Retire By 40 and it got me thinking that this goal is actually possible to accomplish. It won’t be easy. In fact, I think it will require much perseverance, patience, and excellent communication with my wife. 

If you start planning while you’re young to retire at the young age of 40, then you can do it. And the following points are how I plan on retiring by age 40. I want to share these with you so you can achieve this worthwhile goal too.

1) Set Goals - Monthly, Yearly, and Long-Term

You won’t retire by age 40 if you don’t plan out your goals and write them down. It’s proven that the goals you write down are much more likely to be achieved. Have you ever woken up and thought of everything you needed to get done in a day and then forgot about half of those things? It’s part of our human nature.

That’s why I’ve started writing down a list of things I need to get done every morning and then prioritizing it. I’m not perfect at doing this, but it sure is satisfying checking things off the list throughout the day. 

Plus, you won’t forget about what you actually want to accomplish that day. In order to retire by age 40, you will need to have yearly goals that you set. These need to be SMART goals. SMART is an acronym that stands for Specific, Measurable, Attainable, Realistic, and Timely.

Such an example of a goal you can set at the beginning of the year is: “Pay off $15,000 in credit card debt by paying $1250 each month.”  The goal you set should make you stretch, but you should be able to attain it with hard work.

Breaking it down a bit further, a good way for monthly financial goals is to make a budget for the month. This is crucial. We have a monthly budget sheet that we plan out before the month. We follow-up on it weekly during a family council.

Then, we put everyday purchases onto a Google spreadsheet so we can track live-time how much we’ve spent on groceries, gas, entertainment, etc. This allows us to keep track of our spending habits and what we need to change for the following month.

We aren’t perfect yet with our budget. We still need to fine-tune it to meet our specific needs, but we are getting there. It’s a process, but a budget is priceless when it comes to achieving your goals of financial independence.

It is very important that we have a goal or a plan if we want to achieve something. But we also need to know that not only must we have a goal, but we must also have execution. We also need to evaluate the steps we are taking toward our goal from time to time so that we know what needs to be changed to reach it.

2) Save 50% of Your Total Income

Don’t expect to retire by age 40 without saving a solid portion of your income. You need to pay yourself first and save as much as you possibly can. It might not be 50%, or, it might be more. 

Personally, we aren’t yet able to save 50% of our income. It is our goal to be able to accomplish this next year.

Saving 50% of your income might sound incredibly difficult, especially if you are only saving 10% or less at the time. If you aren’t saving that much now, you have 2 options – spend less or make more. In order to save 50% of your income, you will need to find expenses to cut. 

If you are living as frugal as possible and aren’t at the 50% mark, then consider finding extra sources of income. There are many different side hustles and part-time jobs you can find.

3) Max Out Your Roth IRA

From the 50% savings you have, you will want to put this into retirement accounts, particularly Roth IRA’s. While you won’t be able to access this until age 59, this is crucial for your later years in life. The amazing thing about this retirement tool is that your Roth IRA contributions grow tax free! 

You invest your after-tax savings into the Roth IRA. Then, you won’t need to pay taxes on the growth of your investments when you withdraw from it after age 59 and a half.

The current limit to contribute to your Roth is $6,000 per year. This can increase from year to year. If you are married, be sure to max out both you and your spouse’s Roth, which would be over $10,000 a year. 

Check your funds often to review and make any changes you need. A Roth won’t, however, help you when you’re age 40 (unless you use a ladder conversion which is a bit complicated). That’s why we are going to talk about real estate and mutual funds.

4) Invest in Cash Flowing Real Estate

Countless people have used real estate investing to retire early before age 60. One problem with retirement savings accounts like IRAs is that you can’t access them before age 60 (unless you want a penalty).

In my opinion, real estate is an important part of a diversified portfolio because it can produce a monthly stream of cash flow which you can receive at any age (unlike IRAs). People will always need a place to live. I know I will at least.

I plan on buying rental property in a college town and holding it for the long term. By financing the properties with the right loan and proper cash flow, there is a great opportunity for amazing cash flow.

I remember back to one of my landlords when I was in college. He owned 24 apartment units, and I remember calculating that he grosses over $70,000 a year from them. $70,000 a year! I’m not sure what his monthly mortgage was or what he owed, but that is a serious chunk of change.

However, when you own more than a few units, the cash flow from rental income can really start stacking up. You can see why real estate is an important part of a portfolio. Especially if you plan on retiring early.

I also plan on doing live-in flips in the future. Because of the nature of my job, I know that I’ll be moving at least twice before settling down. I plan on buying at least one single family home that needs a little work and doing a live-in flip. 

If you live in a house for 2 or more years, there will be no capital gain taxes from the increased value of the house, regardless of the additions or improvements you’ve made to the place. 

The tax benefits of real estate are so much greater in my opinion than stocks. That may change in the future as laws are amended, but I am a huge proponent of my money growing tax free through real estate.

If you want to learn more about real estate but don’t know where to start, then check out an educational website called Bigger Pockets. It won’t disappoint you. 

5) Invest in Mutual Funds with Dividends

In addition to investing in real estate, I also plan on investing in mutual funds which pay a good dividend. Using mutual funds with dividends to retire early is a popular route to take as well. These funds need to have a solid 5, 10, and 20-year track record when compared to others.

Not only do the funds need to have a long track record, but they need to have a high dividend payout. I also plan on using a Dividend Reinvestment Program (or known as a DRIP). This DRIP will reinvest the quarterly dividends and buy more stock. This complements compound interest and results in great asset growth.

Combined with real estate, mutual funds with good dividends will make up the bulk of our passive income once we reach age 40 and are ready for an early retirement (if we want to). While we may want to continue working at age 40, I plan on being able to retire anytime after that if we choose that freedom.

Are you planning on retiring at an early age as well? What is your plan and what advice would you have for others?