No matter what your age is now, one of the biggest decisions you’ll have to make at some point is when to retire (or achieve FIRE - Financial Independence / Retiring Early).
For some people, the answer to that question is “As soon as possible!” For others, it might be “Never, I love working!”
Most workers in the United States aim to retire in their early- to mid-60s. Why? Because that’s when they can start getting access to their retirement funds and Social Security benefits.
As of this writing, you can start tapping into your retirement accounts without penalty at age 59 ½. And you can start taking SS at 62 (with a 25% reduction in full benefits), or with full retirement benefits 66.
(NOTE: there are some ways to get to your retirement funds sooner. For example, some people can access their 401(k) at 55 with the Rule of 55, and you can use strategies like the Roth Conversion Ladder to access your IRAs earlier.)
Keep in mind that I said “most workers” base their retirement timeline on accessing Social Security benefits or retirement funds. But if you're reading this blog, then you’re likely not “most workers,” and neither are we. So, I’m going to tell you why my wife, Allison, and I retired in our 40s and believe that’s the best time to do it….
Reasons Not to Retire Too Soon
Before we address why we recommend retiring before your 50s, I want to address the other side of the spectrum. The FIRE movement has gotten a lot of buzz and press recently, in large part because the media likes to write about examples of people striving to retire exceptionally early.
Sure, there are some folks you have been able to retire successfully in their 30s, or even 20s. One famous example is Mr. Money Mustache, who was able to retire at the ripe old age of 30. While I think MMM is great, and I totally admire how he was able to retire so early, his story is the exception, not the rule.
Here’s why I am glad Allison and I did not retire before 40 (even though, in hindsight, we could have)....
1. Time to Build Nest Egg
How much money do you need to safely retire? That’s the #1 million dollar question. The usual rule of thumb is to have at least 25x your annual expenses in your retirement nest egg. This is based on the Trinity Study and the famous 4% Rule.
When you start following the FIRE community, you’ll find that there is a wide range of “levels of FI” -- from Lean FI (saving 20x your yearly expenses) to Obese FI (saving 50x your yearly expenses. (To see where you are on your Path to FI, read this post.)
Let’s look at an example: Say your annual expenses are $60K (or $5K per month). In order to be able to retire safely, you would need a nest egg of $1,500,000 ($60K x 25) to cover your expenses with passive income. If you want to be more conservative, you can aIm for “Fat FI” or 30x your annual expenses, which would be $1,800,000. You would then be able to withdraw 4% from your savings to pay for your expenses (adjusting as necessary).
This chart shows how much you would accumulate over the course of 10, 15, 17, or 20 years if you saved between $2K and $6K per month. I used a compounding rate of return of 5%, assuming you will be investing most of your savings in equities (stocks), which have averaged ~8% over the long haul, minus ~3% for inflation. (You can play around with different rates of return and timelines with this calculator).
The light green boxes indicate reaching regular FI (25x your expenses), and the dark green indicate Fat FI (30x your expenses).
Notice that there are exactly zero scenarios that get you to FI in only 10 years under these assumptions. It typically takes a good 15-20 years to build up a strong solid nest egg (accounting for ups and downs in the market along the way).
Is it possible to do in 10 years? Sure, you may get lucky and see another 10-year crazy bull market. But if you want to play it a little safer, you can see the power of waiting for another 5-10 years.
In order to build up your next egg, you need time to earn money and invest it so it has time to grow. We goofed around in our early and mid-20s, but we got serious about finances in our 30s. We worked hard and hustled for about 17 years (from 1998 - 2015).
2. Salaries Peak Around 40ish
According to this Forbes article, the peak salary age for women is 39 and for men it’s 48. (When Allison saw that, she said I should go back to work.) You do not want to miss out on your peak earning years. Unless you are in a very high earning field, you likely will not be making a lot of money in your 20s.
My starting salary for my first Internet marketing job in 1999 was $45K (I was 28 years old). At the time that seemed like a good salary to me, but certainly not enough to sock away anything close to early retirement money in the Bay Area.
My next job jumped up to $72K in 2000 (at the height of the dot-com craze), and that seemed like a huge salary. I remember getting the offer in my interview and trying to play it cool, like that salary was exactly what I was expecting.
After a little hiatus in 2001 - 2002 from the dot-com bust, I eventually settled into a nice salary in the low six figures for about a decade. It peaked out around $140K in my late 30s.
Allison’s career and salary history was very similar to mine. She actually made a little more than me for a few years, because she tended to work for larger companies that could afford more and her role was more technical than mine.
The key here is to take advantage of your earning potential in your 30s. For most people, that is the time when you are in highest demand, you are an expert in your field, you still have the energy and passion to work hard, and you are at (or near) your peak salary.
3. Time to Survive Bear Markets
Investing in the stock market is one of the best strategies to build your wealth in the long term. Allison and I started investing as soon as we got jobs with access to 401(k) plans in the late '90s, and that was a major driver toward reaching FIRE.
(NOTE: Many people in the FIRE community advocate investing in real estate. We experimented with that for a couple of years, but in the end, it wasn’t the income vehicle that appealed to us; YMMV.)
That said, investing was not always roses. We experienced two massive market crashes (the dot-com bust and the Great Recession of 2008). The key is to give yourself a longer investing time horizon, so you can reduce your risk of being heavily impacted by recessions and bear markets.
Throughout the down markets, we never stopped contributing every pay period to our retirement accounts. We took full advantage of dollar cost averaging, so when the market was down, we were “buying on sale.”
If you only give yourself 10 years (or less), you risk being impacted by down markets, especially if they occur at or near when you stop investing. However, if you give yourself 15- 20 years of steady and consistent investing, you are much more likely to take advantage of the bull markets that will help pad your nest egg.
4. Peace of Mind
I read about a lot of younger people who are so eager to achieve FIRE that they are willing to retire at Lean FI, or what some people call Barista FIRE. Barista FI is basically a lifestyle one step below full FIRE (like working part-time at a coffee shop or driving for Uber), where you just need to earn a little extra money to make ends meet or qualify for health insurance.
While there is nothing wrong with living lean and being super frugal (we've done it ourselves), I highly recommend erring on the side of caution when aiming for FIRE. Unless you absolutely hate your job and working full-time, there is a lot more upside to working that extra 5+ years to really shore up your finances.
Allison and I are fortunate to be at or above the Obese FI level, but even we occasionally get spooked by dips in the market. After living through the 2008 Recession and losing about half our wealth at that time, we just know you have to be prepared for anything.
Reasons Not to Retire Too Late
Now, let’s look at why you shouldn’t wait too long to FIRE. I am sure you know people who are over 50 (or 60) and have no intention of retiring. Perhaps these folks really love their jobs, so they should keep on working.
Many people would love to retire early, but they are afraid of the unknown, or that they will be bored, or they will lose their purpose or identity. Or, heaven forbid, what will other people think? (We get all kinds of interesting reactions to achieving FIRE).
But I can tell you that after 4+ years of being FIREd, Allison and I are thrilled we made this choice. Here are just some of the reasons not to wait too long….
5. Time for Travel & Adventure
It is amazing how many times Allison and I have been traveling and met people in their 60s, 70s, or older who were finally traveling for the first time in their lives. They never had the time or the finances to do it when they were younger and working constantly.
One of the most awesome experiences in life you can have is to travel around the world and learn about other cultures, people, food, natural wonders, history, art / architecture, etc. Here are 6 reasons to travel as far and wide as possible.
Allison and I wanted to make sure that we had the health and stamina to do big trips, to hike up the Great Wall of China, or climb the steps of the Leaning Tower of Pisa, or kayak around Halong Bay in Vietnam.
We traveled once in awhile when we working, but we never had the time for long vacations. Now that we’ve FIREd, we go away for three to six weeks at a time. We’re currently planning a two month trip to South America at the end of 2019.
6. Time to Discover New & Interesting Things
When you are working full-time, you typically do not have the time or energy to spend on other pursuits (other than household chores or being a weekend warrior). If time was no longer an issue, think about all of the interesting hobbies you could explore.
Here are just a few examples: learn how to play guitar, brush up on your Italian, volunteer at the local pet shelter, mentor some less-fortunate kids, or create a garden in your backyard. The list is endless and only limited by your imagination.
Allison and I do all kinds of things now that we have more time: work out almost everyday, walk along our waterfront daily, swim in our pool, cook meals at home more, go to more art and science museums, and get involved in our community.
There’s never a dull moment. Here are 10 cool things we’ve done since achieving FIRE (& 5 we’re planning).
7. Time for a Second (or Third) Act in Life
Contrary to popular opinion, people who retire in their 40s don’t just sit around all day in a hammock. Sure, we could if wanted to, but most of us want to keep doing things (but now it's things we like to do)!
And reaching FIRE doesn’t mean you can’t earn money for doing things you enjoy. You may decide to become a blogger, an artist, or an entrepreneur. You may want to volunteer more, or join the Board of a company or non-profit you admire.
Heck, maybe you even decide you want to run for political office, because you are tired of the way things are being run in your community. The point is you now have the time to do something completely different and more interesting with your life. Think of it as your second (or third) act in life.
8. You Don’t Know How Much Time You Have on Earth
I had a near death experience from pneumonia when I was just in my late 30s. That experience was probably the biggest catalyst for us to achieve FIRE in our 40s.
Fortunately, I survived this experience thanks to all the doctors and nurses, and with the love and support of Allison and all my family and friends. And at the same time, I gained a whole new appreciation for life. I realized more than ever that life is precious, and nothing is guaranteed.
Just this month, actor Luke Perry died after having a massive stroke; he was only 52. It was a shock to many people, including a lot of my friends who are around 50 now.
If you think that was a fluke, here are just some of the many celebrities who lost their lives before the age of 65 (the age most people plan to finally retire). RIP to those who left us far too early:
River Phoenix (23), Notorious B.I.G. (24), James Dean (24), Tupac Shakur (25), Kurt Cobain (27), Amy Winehouse (27), Jim Morrison (27), Jimi Hendrix (27), Janis Joplin (27), Brandon Lee (28), Heath Ledger (28), Brittany Murphy (32), Bruce Lee (32), Chris Farley (33), John Belushi (33), Princess Diana (36), Marilyn Monroe (36), Corey Haim (38), Anna Nicole Smith (39), John F. Kennedy Jr (38), Elvis Presley (42), Freddie Mercury (45), Philip Seymour Hoffman (46), Whitney Houston (48), Phil Hartman (49), Bernie Mac (50), James Gandolfini (51), George Michael (53), Prince (57), Tim Russert (58), Carrie Fisher (60), Anthony Bourdain (61), Bill Paxton (61), Farrah Fawcett (62), Robin Williams (63)
Lesson: Do NOT put off life. Enjoy it while you can!
Conclusion
I consider achieving FIRE in your 40s to be the “Goldilocks solution” -- not too early and not too late.
You don’t want to find yourself penniless in your 80s, because you didn’t work long enough to build up your nest egg. If you can buckle down and put in that 15-20 years of effort, it will definitely pay off in the end.
And you certainly don’t want to be the poor schmuck who kept working year after year in a job they didn’t love, and then didn’t have the energy to enjoy post-retirement life. Once you have more than enough money socked away, don’t be afraid to make the leap.
As one happy retiree told me, “I want to enjoy the money I made all these years. I don’t want to be the richest person in the cemetery.”