How much do you actually need to retire at 40 – and how to get there

If you want to retire at 40, the typical advice is this: You’ll need to have 25 times your annual expenses saved before you stop working. In other words, if you expect to spend $80,000 a year, you’ll need $2 million by 40.

However, experts warn that early retirement changes the math and comes with many challenges. You’ll need to make sure you save enough money and account for decades of unknowns, from health care costs to market downturns.

Why does the 25x rule fail?

The 25x rule works reasonably well for someone retiring at 65, but Noah Damsky, founder of Marina Wealth Advisors, says it won’t do the trick if you plan to stop working at 40. “At age 40, you’re not just planning for your traditional retirement years. You’re also planning for income replacement that could be your prime income years while you’re in your peak spending years.” “Shoot more than 25 times, and more depending on the tax liability of your assets.”

Chris Deodato, founder of WELLth Financial Planning, agrees that the rule is helpful but imperfect. “All ground rules have limits,” he says. “On the other hand, the 25x rule assumes that spending will be constant over time, but in many cases, it is not.” He points out that mortgages may eventually be paid off, and retirees may work part-time, but inflation, lifestyle changes, or raising children can also drive up costs.

Preparing for a (very) long retirement.

When you stop working at age 40, you may need to finance more than half a century of expenses. This comes with risks.

“Providing health care for a family outside of employer plans can be expensive,” Damsky says. “Miscalculating expenses can be a death knell and may put you back in business if it is a big enough mistake.”

Deodato stresses the need to plan for inevitable disruptions. “Market and economic shocks will be inevitable, as well as changes in tax rates and government programs,” he says. To prepare clients, he tests retirement plans against higher taxes, inflation or cuts in Social Security. “But the important thing is that these tests and conversations are done before a negative event occurs, not during it,” he adds.

Investment strategies and common pitfalls

With a longer horizon, your investment strategy changes as well. Damsky points out that early retirees are considering long-term private investments. “It can be directed towards growth or income and meet your risk appetite and liquidity needs,” he says. “But be careful of land mines, as there are many opportunities for error.”

Meanwhile, Deodato often advises FIRE (Financial Independence, Retire Early) clients to stay aggressive until they actually retire. “I usually tell aspiring early retirees to invest fairly aggressively up to the point of retirement, unlike traditional retirees, where I suggest offsetting risk for years before cashing out their final paycheck,” he says. The reason, he says, is that many FIRE followers have the flexibility to continue working for a few more years if markets decline.

Both advisors warn against poor planning. “Unrealistic expectations can quickly derail your plans,” Damsky says. “Keep asking yourself how your situation could get worse to get a glimpse into your blind spots.”

For example, Deodato often sees clients underestimate the costs of health insurance or overestimate how much they actually want to spend after retirement. Trying to imagine several scenarios can help you know when things might get risky.