Over a 40-year time horizon, even someone earning minimum wage can become a millionaire.

No, really: if you invest $190 per month at an average historical stock market return of 10% return, after 40 years you’d have $1,009,111.

But what if you want to retire at 40? With less time for compound interest to work its magic, you have to rely more heavily on savings rate, leverage, and income-oriented investments. And raw income of course — it’d be tough to retire at 40 earning the minimum wage.

Here’s what young people need to know about reaching financial independence and retiring early (FIRE), as they scope out how to retire at 40.


Start by Setting a Retirement Horizon

It’s a lot easier to retire by 40 if you start investing for it at 22 rather than 37.

“Retirement horizon” refers to the timeline that you want to retire within. If you’re 30 and looking for how to retire by 40, you have a ten-year retirement horizon. If you’re 22 and looking to retire at 40, you have an 18-year retirement horizon. And so forth.

In fact, no matter your current age and target retirement age, you should plan in terms of retirement horizon.

The more time you have to work with in that retirement horizon, the more you can lean on compounding, and the less you have to rely on savings rate each month. Check out our FIRE calculator to play around with different numbers, but to start planning for financial independence and retirement, you need to start with two numbers: your target monthly income from investments, and your retirement horizon.

From there, you can start determining how much money you will need to retire at 40.


financial independence retire earlyPassive Income Sources for Retiring at 40

Your post-FIRE income has to come from somewhere, as you plan how to retire by 40. It certainly won’t come from Social Security!

The sources of income also play a role in determining how much you will need to retire at 40. I’ll use my own plans as a rough outline:

Stocks: 30% of my post-FIRE income

Passive Real Estate Investments: 60% of my post-FIRE income

Rental Properties: 10% of my post-FIRE income

Active Income: gravy. I never plan to stop working in some capacity, so I’ll keep earning money long after I no longer need to work to cover my living expenses.

Your plans may look dramatically different, but consider the following as a sound starting point as you plan your post-FIRE income sources.


1. Stocks & Safe Withdrawal Rates

In the traditional retirement model, you gradually save up a nest egg over the course of your career, then you spend it down over a 20-year retirement. Your goal: to not run out of money before you shuffle off this mortal coil.

That model doesn’t work for financial independence and retiring early. With a retirement that could last half a century or longer, you can’t spend down your nest egg. Instead, you want sustainable, ongoing income.

Which brings us to the concept of safe withdrawal rates and the 4% Rule. If you’re not familiar with the 4% Rule, it posits that if you withdraw no more than 4% of your nest egg in the first year of retirement, and only adjust upward to cover inflation each year thereafter, then your nest egg should last at least 30 years.

But 30 years of retirement doesn’t cut it for people trying to figure out how to retire at 40. Which means you have to withdraw less of your nest egg each year if you want it to last longer.

Fortunately, you don’t have to withdraw much less. Financial planner Michael Kitces demonstrated that a 3.5% withdrawal rate would actually leave your nest egg intact and growing forever — at least based on historical stock market data. Aliens could attack tomorrow and wipe out the stock market, so the future remains uncertain. But you’d have been fine with a 3.5% withdrawal rate any time over the last century.

Everyone should have some stocks in their portfolio. Whatever percentage you choose, plan on being able to pull out 3.5% of your balance in your first year of retirement. For example, if you want $35,000 of annual income from your stock holdings, you need $1 million in stocks.

Consider investing in stocks with your IRA or employer retirement plan, to score some tax benefits on these investments. As a younger investor, Roth retirement accounts in particular let your stocks, mutual funds, or market index funds compound tax-free.

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Katie earning passive income from real estate syndications

2. Rental Properties & Leverage

With rental properties, you don’t have to worry about safe withdrawal rates. They generate ongoing income, month in and month out, that you can accurately predict over the long term with a rental income calculator. The income inherently adjusts for inflation as you raise rents each year, creating a hedge against inflation.

You can also leverage other people’s money to build your own portfolio of income-producing assets. The rental property loan covers 70-80% of the purchase price, and you still earn strong real estate cash flow each month from that leveraged property.

In fact, you can even recycle the same down payment over and over again to keep building your portfolio. The BRRRR method of rental investing lets you pull your down payment back out of the property after renovating it!

In this way, you can take the same $50,000 and keep recycling it, buying three or four new properties each year. If each property generates $250/month in cash flow, and you buy four properties per year, then you will have another $1,000/month in passive income every year. After ten years, you’d have $10,000/month in passive income — all from recycling the same $50,000 down payment and operating capital.

Starting to see how to retire by 40 with real estate?


3. Passive Real Estate Investments

I don’t just invest in rental properties, even among my real estate investments. To diversify, and to outsource the labor of finding deals and managing properties, I sometimes invest indirectly in real estate through other investors.

After all, there are many types of real estate investments. My primary way to invest passively is real estate syndications, which earn me anyway from 15-50% annually. But to further diversify, I don’t stop there.

To invest in commercial real estate and office space, I invest some money through Streitwise. For exposure to large apartment buildings, I invest with Fundrise. For shorter-term investments spread among single-family rentals across the country, I lend money through GroundFloor.

I earn roughly 8-14% annually on these real estate crowdfunding investments. In most cases, those returns are immediate income in the form of dividends or interest, although in the case of Fundrise it also comes in the form of long-term appreciation.

I also lend money to other real estate investors I know personally, in the form of private notes. These are investors I know and trust, and I’ve never been let down yet. These add even more streams of passive income from real estate for me.


how much do I need to retire at 404. Active Income

I never plan to stop working in some capacity or another, even if only part time. So I’ll have active income in addition to passive income, long after I reach financial independence.

In your case, you could decide to freelance after you retire at 40 or do some consulting in your area of expertise. You could start an online business, or even start a blog writing about how to retire at 40! Or travel the world and become a travel blogger for both income and perks like free accommodations.

Or you could work for a non-profit in an area of passion for you, earning a smaller but still real salary.

Whatever you do, the world needs your contributions. And for those contributions, you can expect to be compensated, even if you earn less than your current high-stress day job. Think of it as supplemental income in addition to your investment portfolio income, helping you reach your financial goals faster.


Sample Numbers for How to Retire at 40

I can already hear you asking:

“That’s all well and good, but how much money do I need to retire at 40?”

A relevant question, if one that varies for every person. By way of example, let’s say you’re 30 years old and looking for how to retire by 40, so you have a ten-year retirement horizon. We’ll also say that you want $6,000/month ($72,000/year) in passive income in retirement.

Of that income, you want 20% ($1,200/month) to come from stocks. That $1,200/month comes to $14,400/year in income — to reach that, you’ll need $411,429 invested in the stock market if you take a 3.5% annual withdrawal rate (3.5% of $411,429 = $14,400).

You also want 50% ($3,000) of your monthly passive income to come from rental properties. Let’s say that you earn $250/month per rental property: that means you’d need 12 rental properties to generate $3,000/month. Let’s further imagine you use the BRRRR method, using $50,000 as capital for down payments and closing costs, and you leave $10,000 wrapped up in each property. You’d need the initial $50,000 as working capital, plus $120,000 for the $10,000/property you leave in them. But you get back the $50,000 at the end, so the total you need tied up in these investments is $120,000.

The remaining 30% ($1,800/month, or $21,600/year) you expect from indirect real estate investments. If you earn a reliable 8% return on these, you would need $270,000 invested (8% of $270,000 = $21,600).

So how much money do you need to retire at 40? In total, this example comes to $601,429 invested in retirement savings to generate $6,000/month in passive income. No small feat, but far from impossible over a ten-year time horizon. Remember, each year your passive income​ will rise as you add to these investments. You can funnel that extra income directly into more passive income streams, to snowball your income faster over time.

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Investing Capital: Boost Your Savings Rate

The money to start investing has to come from somewhere. Unless you inherit it or marry rich, it comes from your savings rate: the difference between what you earn and what you spend.

That gap is the source of your financial power! “Mind the gap,” as they say in nerdy FIRE circles. The less you spend and the more you save, the faster you can build wealth and passive income, in order to retire at 40.

My favorite way to save money faster involves house hacking to eliminate your housing payment. There many ways to house hack — from housemates to renting out storage space, employer-provided housing to multifamily house hacking, find a way to get rid of your housing payment. Deni got creative with hers, bringing on a foreign exchange student whose stipend covered her mortgage. If you’re thinking about multifamily house hacking, an accessory dwelling unit, or using housemates, use our free house hacking calculator to run the numbers.

Also look to the second and third highest expenses for most people: transportation and food. Along with housing, these expenses make up around two-thirds of the average American’s household budget, according to the BLS. That means they offer the greatest opportunity for savings.

Which doesn’t mean you should ignore other expenses like entertainment and clothes. By all means, ditch your cable subscription, stop pampering yourself with spa days and new clothes every month. You don’t need them, and they’ll prevent you from retiring by 40 by dragging down your savings rate and therefore your investing capital.

Lastly, freeze your spending to avoid lifestyle creep. That might seem easy now, but it’s harder to remain a super-saver when you get a hefty raise at work. People with six-figure salaries don’t reach financial freedom any sooner if they spend every raise!


Use the FIRE Lifestyle to Accelerate Your Timetable

Lowering your living expenses accelerates your retirement timetable from two directions at once.

First, it lets you put more money into investments, as outlined above. But just as importantly, it lets you lower your target for post-FIRE passive income. The less you spend, the less passive income you need to cover those annual expenses, and the sooner you can reach it.

For an easy illustration, consider this “tiny blocks” visual we covered in our Retirement Catch-Up Plan. To keep the math simple, imagine you’re following the 4% Rule. That means that you need 25 times as much money saved as you spend each year. In other words, for every dollar you spend in a year, you need $25 saved.

how to retire by 40 - 4% Rule visualization

In this visualization, each red block represents $1,000 of spending. Each green block represents $1,000 of savings. Here’s how it looks if you spend $30,000/year:

how to retire at 40 - block visualization

Not pretty, right? Cut your spending, reach FIRE exponentially faster.

That’s the “bad” news. The good news is that trimming your spending and living the FIRE lifestyle actually helps you save on other expenses that most people have to pay. For example, many people following the FIRE lifestyle can avoid the costs of life insurance and long-term disability insurance, as they build their net worth and passive income. Their families could survive even if they were no longer earning active income.

Another hidden benefit of the FIRE lifestyle? You’re less dependent on your job to pay your bills, which puts you in a far greater negotiating position. And many people pursuing FIRE leverage telework to move to a lower cost of living area and take advantage of geoarbitrage. I earn money in US dollars, but I live in Brazil, where they go a lonnnnng way.

Those are just the tip of the iceberg. Read up on the other hidden benefits of the FIRE lifestyle for more ways that savings beget more savings!


Plan for Post-FIRE

When people first discover that they don’t have to work until 65, many envision retiring by 40 as sitting on a beach sipping daquiris for the rest of their days. That might be fun for a week, but it gets old fast. The reality is you’ll want to create a rounded, meaningful next life after you no longer need your high-octane job.

Again, it probably involves working in some capacity, albeit doing something fun and fulfilling and possibly lower-paying. You could open a microbrewery, or write novels, or freelance while traveling, or become a travel blogger. You could take up your favorite cause, working at a nonprofit.

Start thinking about your ideal work now. You might just find that you can take it up within the next year or two, and don’t need to reach full financial freedom to switch to your ideal work. Again, lower living expenses and a higher savings rate help you get there faster.

Also consider where you want to live. Ideally opt for a place with a low cost of living, whether within the US or outside of it. Read up on the cheapest real estate in the US for a few ideas, and consider moving to a state with lower taxes. Or, for that matter, alternative housing ideas to save money and have more adventure!

As you plan out how to retire at 40, don’t forget to plan for medical expenses. Your post-FIRE career might offer medical insurance, of course, but it might not. Fortunately, there are more options than ever for health insurance for early retirees — a few include HSAs, association health plans, healthcare sharing ministries, and many others.

And, of course, you can move abroad! Americans believe this myth that they have the best healthcare in the world. While the US does offer plenty of world-class doctors and hospitals, it certainly doesn’t have a monopoly on them. You can find equal or better care in plenty of other countries, often at a fraction of the cost. See how one couple retired early to live on a houseboat touring Europe’s rivers, all while saving thousands of dollars each year on healthcare.


Final Thoughts

The people who scoff at the FIRE movement tend to never even consider how to retire by 40. They focus on the lower living expenses and see nothing but “sacrifice” and deferred gratification.

In doing so, they miss the point entirely. A life without new designer clothes every month and massages every other week is not a sacrifice to me. I enjoy living a simpler lifestyle, wearing athletic clothes to work every day, living overseas, cooking upscale meals at home rather than eating out every other night.

And while they’re still paying off debts at 45, 55, 65, I will have long been financially independent. No, I won’t actually retire at 40. But that’s because I love what I do, and I’m living my life by design and intentionality. I never plan to work for someone else again, to set an alarm clock again, or to wear a suit to anything other than weddings and funerals, and it brings a smile to my face.


What are your plans for how to retire at 40? How much do you need to retire at 40? What’s preventing you from taking more steps to make it a reality?



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About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

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