by Catherine Woods

Created on: April 09, 2010

For many, retiring by age 40 is nothing more than a pipe dream because they do not take the time to figure out how to do it.  The fact is that most people that retire at age 40 did not hit the lottery or come into unexpected money.  Instead, they worked hard and planned well to be able to reach that goal.  The formula they follow is very simple but can be hard to stick to.  However, if you follow these steps, you will find yourself enjoying your retirement party at age 40.

Find Your Retirement Date

You need to find out exactly how long you have until you retire at age 40.  Simply subtract your current age from 40 and that is how long you have to save and invest until retirement.  If you want, you can multiply the number of years you have until retirement by twelve to get how many months you have left.  The number of months until retirement can be useful when it comes to saving, so this is a good number to go ahead and calculate.

Estimate Future Living Expenses

Next you need to estimate what your yearly living expenses will be during your retirement.  Sit down with your current budget and total it up for the year.  Then, multiply your yearly budget by the number of years you expect to live past age 40.  You could stop there, but you need to adjust this number for inflation.  It is safe to say that if you multiply the number you come up with by 20%, it should cover inflation.  The number you end up with is the amount you need to save in order to retire by 40.

Calculate Monthly Savings

Now you need to find out how much you need to save every month to reach your retirement savings goal.  All you need to do is take the amount you will need to live on and divide it by the number of months you have until you retire.  That is how much you need to set aside every month in order to retire by age 40.

Find Extra Money

If you are like most people, that monthly amount is not something you have just laying around; so start cutting down your monthly expenses as far as you can.  Stop the morning coffee runs, cut back your cell phone plan and eat at home more often.  Find anyway possible to cut back your expenses so you can set aside money to retire by 40.

If you cannot cut your expenses low enough to make your monthly goal, look for ways to make money as well.  Try getting a second job, mow lawns, donate plasma or even write online to bring in extra money.  There are plenty of ways to earn extra money in your free time if you look.  Just make sure that any extra money you make goes toward your retirement savings.

Invest in Short Term Investments

Once you have enough money to make your monthly goal, invest it so you can make the most out of it.  Typically, if you are looking to retire by age 40 you should look into mid-term to short term investments.  Look at how long you have until you retire and find investments with a good track record over that amount of time.  If you will be retiring in five years, then you should look at investments that performed well during that time period.  Just make sure you vary your investments so that if one market does poorly during that time period, your life savings does not go with it. 

If you follow these five steps and work hard, you will be able to retire by age 40.  For most people, retiring this young will mean that sacrifices will have to be made.  You may not go on expensive vacations or drive fancy cars, but you will have the pleasure in knowing that you will be retired while your peers are still working.  So work hard and stick to the plan and you will be able to say that you retired at age 40.

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