What we can learn from those who want to retire by 40

Woman with chains attached to her ankles previously is now set free and leaping into the air with the sunset in the backdrop.

News & Insights

MoneyPlus Features Team

28th September 2017 at 9:00am

If you want to retire earlier than most people typically do, you are not alone.

A US movement known as early retirement extreme has sprung up, dedicated to the idea of finishing work by 40, or even sooner.

“I think ‘financial independence’ will be to the 21st century what ‘retirement’ was to the 20th century.” Jacob Lund Fisker

Enthusiasts, bloggers and writers share ways to live frugally, spend only on bare essentials, drive old cars and save and invest up to 70% of their income.

According to Forbes magazine, it all took off thanks to a best-selling book and blog called Early Retirement Extreme from Jacob Lund Fisker, a Chicago scientist who retired at 33 after saving enough, he believes, to last him the rest of his life.

As he explained to CNBC, it’s simply about ‘keeping the “big three expenses” — housing, transportation and food — as low as possible: “Look at those top expenses and see if there’s any negotiating room.”’

Then there’s Joe Udo at Retire by 40 who gave up his engineering career with Intel after saving and investing it all.

He now tracks his cash flow, investments and net worth with forensic accuracy and focuses on being a stay-at-home dad and part-time blogger, although his wife still works and her salary is, he admits, crucial in helping his family’s savings grow.

Mr Money Mustache is another. He retired 11 years ago at 30, and believes, “if you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37”. Living the way he does is all about happiness over consumerism and living frugally.

There’s much to admire about the dedication and organisation which allows them to save hard and fast, investing upwards of $500,000 in funds and shares to last them for (hopefully) as long as they need it. They put their money to work so they don’t have to.

It’s really about financial independence

Ultimately, what those extreme budgeters want is what most of us do; the financial independence to live life comfortably, at the very least. But is it retirement?

“I should have called it Financial Independence Extreme,” Jacob Lund Fisker told Forbes. “I think ‘financial independence’ will be to the 21st century what ‘retirement’ was to the 20th century.”

Take a measured approach

But what if you are you planning to take the slower, more usual road to retirement? One that allows you to balance living well now with saving for later?

One that is more realistic and a lot more pleasurable.

You want a nice car and need something reliable for the school run or commuting to the office. You’d like to have enough to spend on the moments that matter now – education for the children, weddings – and in the future.

You might work because you want to because, as the actor Warren Beatty once said, if you love your job you never really have to do a day’s work in your life. There’s even research showing that staying in work might mean you actually live a bit longer* (as long as you don’t hate your job).

Perhaps you might go part-time at some point or become self-employed when you reach your mid-50s, funded by your pension savings.

But one thing is certain, and that is saving gives you choices.

The good news is it’s something we’ve looked at from a number of angles which can help you with your planning, whether you’re in your 30s or in your midlife years. While starting sooner is better, there’s still time to make the most of your savings.

Take steps towards the future you want

How much you need to live on after you begin to access your savings depends on so many factors, including your lifestyle, life expectancy (as best as you can know it) and whether you have outgoings such as a mortgage still to pay.

It’s where a financial adviser can really help you make detailed plans or guide you on how to make the most of your finances tax efficiently.

Our retirement calculator can give you an idea of how much you might need each year, based around your circumstances.

Check what you might get from your savings

There are online tools which are simple and quick-to-use to help you understand if you’re saving enough to enjoy the type of retirement you have in mind, including this one from us.

Why saving into a pension makes sense

Of course, things are different in the UK compared to the US and its extreme early retirement movement.

Saving into a pension here is very tax efficient as you benefit from tax relief based on the rate of income tax you pay.

As we’ve written about before in our Tax relief: The magic ingredient to boost your pension savings article, if you earn £50,000 and want to boost your pension savings by £7,000, with 40 per cent tax relief worth £2,800, the cost to you would be just £4,200.

If you’re in a workplace pension as so many of us are now, it makes sense to take advantage of any matching contribution from your employer.

Of course, while there is no guarantee how much you’ll get back, as a pension is an investment and you could get less back than you pay in, it’s certainly a more balanced way to save for the future you want .

How soon that is, is up to you.

*According to a recent study cited by the Center for Retirement Research, Boston College, USA.


The information in this blog or any response to comments should not be taken as financial advice. Laws and tax rules may change in the future. A pension is an investment and you may get less back than you paid into it.

Standard Life is not responsible for the content of external websites.

The information here is based on our understanding in May 2017.