How to Retire by 40: Three Keys to Financial Freedom

I read more and more articles about people in their 20s and 30s quitting their successful jobs in the middle of their busy career and "retiring". They graduate top of the class, get in with a great company, pass a major certification for a promotion, and then work all day and night to go on vacation once a year and keep up with the Jones'. Sound familiar?

More and more "millennials" are beginning to buck the trend of the 9-5 (really 8-6) and starting to realize what it takes to "retire", a term also known as financial independence. Financial independence is when you no longer have to work to earn income to cover your living expenses. You might be asking, then how do you pay for your living expenses? The top three ways that come to my mind are: savings, passive income, and eliminating debt.

1.      Savings

Based on many different factors and stages of life, savings is tough. However, the road to financial independence depends on it. Whether you do it through your employer’s 401(k), an IRA (traditional or Roth), or a brokerage account at Charles Schwab, as long as you have money going into a separate account on a regular basis, you are on the right track. One important factor that is key to financial freedom is that your money is being invested. Anything beyond your 3-6 month emergency fund should be invested in some sort of way. Sitting in your savings account collecting 1% (at best) does not count as being invested.

Depending on when you need the money, investing in the stock market has proven to be one of the best places for it. If you are too scared to do it yourself or don't know if you are investing in the right funds, then meet with a financial advisor. If you don't know any, ask someone that you trust who they use and go from there. Do your research, Google credentials, and learn to trust someone with your financial life. A popular and well regarded industry designation is the CFP?. Certified Financial Planners? are known to draw comparisons to your primary care physicians as they have a broad base of financial knowledge and can help you create a plan that will put you on the path to financial freedom.

2.      Passive Income

Another way "millennials" are finding ways to retire early and become financially independent is by generating passive income. Passive income is when you get paid for something that you are not actively involved in, such as owning a rental property, a limited stake in a business, or investments that kick off income (bonds, dividends).

Owning a rental property could be a very financially rewarding venture if in the right market and in the hands of the right property manager. Assuming you don’t have a loan on the property, with the national rent average for a 2 bedroom apartment being ~$1,200 per month, subtracting taxes and property management fees, you could expect somewhere around $800 per month of passive income. Same goes with owning a business franchise or limited partnership, all of which can be extremely profitable, but with more profit comes more risk as you are depending on others to make business decisions and generate profit in your absence.

Another popular avenue that retirees use to keep the lights on when they are done working is through their investment income, also called portfolio income. Not to say that you have to be of retirement age in order to generate investment income, but it takes most people 30-40 years before they save up enough for the income to be significant. For example, a $100,000 municipal bond paying 5% per year (generally tax free) would only net the holder $5,000 per year, paid semi-annually. However, if you find a way to save enough and continue to grow that savings with a diversified portfolio of stocks, bonds, and alternative investments, it is possible to generate income and grow the principal so that your money will last as long as you decide. Financial advisors can often help create an income plan that will take into account how your money will be invested, what the anticipated rate of return will be, and how much to withdraw in order to maintain a consistent income for a set period of time.

3.      Eliminating Debt

Lastly and arguably the most important characteristic of retirees and people free from the pressure of the 9 to 5 is the elimination of debt. Think about it, if you had no bills to pay, why tie yourself up being somewhere you don’t want to be for 40-50 hours a week? Wouldn’t you rather be on a beach, hanging out with friends, or spending time with the people in your life that matter? If you have no mortgage to pay, no car payment, cut your cable to Wi-Fi only, settle with the iPhone 6 instead of 8, and limited eating out to once a week, how much does it really cost to live?

This theory may sound out of reach for most of us. As we have student loans still to be paid, a brand new mortgage if we are lucky, and a car payment only because our college beater just broke down. However, if you develop a financial plan, stick to it, and learn to cut out the unnecessary evils of the world (eating out, Starbucks, latest iPhones, buying a house as big as the bank says you can afford, used luxury cars and their repairs, expensive vacations, etc.) then you will put yourself in position to be able to do what you love for a living, even if the pay isn’t great. 

So we come back to the purpose of this article, why someone at the age of 32 would want to retire? Most of the time it is because they are burnt out from their 8 to 6 job (not including the 45 minute commute both ways) and they want their life back. Hopefully this article can open up the possibilities of altering your lifestyle a bit, following a financial game plan, and taking a different approach to the fast paced corporate world that so many of us are funneled into.