How to retire at 40

It could be during the weekend recovering from another mad week at work. Or while heading to work negotiating the Monday morning rush that you yearn for a permanent break from the eternal grind and retire early. Many people want to retire at 40 but very few manage to do it. Experts attribute it to inadequate understanding of early retirement challenges and absence of a well-thought-out roadmap. Here, we help you decide whether retiring at 40 is for you or not.

Instead of Dh11,000 per month to save Dh4.75 million by age 40, one could begin with Dh6,500 per month, but with a 10% annual increase. With annual 8% return, this helps save more than Dh5.63 million at 40 and cross Dh4.75 million in 15 years and 11 months, almost a year ahead of time.

Challenges of retiring at 40

A popular misconception about early retirement is that it is almost all about saving a lot of money. The truth is it involves so much more.

Why retire at 40?

Bad work-life balance or a bad boss does not necessarily need early retirement. You can switch jobs and careers. People, typically, focus on what they are “retiring from” instead of what they are “retiring to”. In other words, an unhealthy fixation on things they dislike, ignoring what they love. Of course, a major reset of your life may require early retirement. Take the case of Anupam Mittal, a senior finance professional, and Sakina Bano, a former human resource (HR) professional, with an MNC. They both quit their successful corporate careers at around 40 to pursue their interests. Mittal wanted to pursue his passion in music full time, while Bano sought a more fulfilling life. “I felt I was on a treadmill heading nowhere,” says Bano who re-skilled herself to become a highly successful life coach.

What will you do with your time?

Ask yourself what retirement means to you. Like all goals, find out if it is realistic and achievable. Our self-image and self-esteem are mostly determined by our job, designation, and their trappings. “I trained myself to reduce my dependence on how others perceive me. This is critical for achieving financial and emotional security early,” says Rishikesh Bahadur. At 40, he gave up his job with a consumer goods’ MNC for trekking, theatre, writing and mentoring startups.

When you retire early, the amount of time at your disposal can be much more than you think. You need a plan to make effective use of it. The acclaimed book The 100 Year Life: Living and Working in the Age of Longevity, authored by Lynda Gratton and Andrew Scott — dons at the prestigious London Business School — provides crucial insights.

Staggering rise in longevity:

The book says that in the last two centuries, on an average, life expectancy increased by three years every decade and people turning 100 will be common very soon. In the UAE, according to World Bank, life expectancy rose from 72 years in 1990 to 78 years in 2020. This means anyone retiring at 40 in the UAE today needs to plan for four decades of retirement. It will be still greater for a 25-year-old.

Reality of being “younger for longer”:

Gratton and Scott and other experts point out that with medical advances, healthcare facilities and better lifestyles, people are leading far more active lifestyles as they age. Being “younger for longer” is transforming public attitudes too.

In a recent study, Longevity and the New Journey of Retirement, by US financial services major, Edward Jones and Age Wave, a prominent US think tank on population aging, 55 per cent of pre-retirees and the retired, viewed retirement as a “new chapter in life” compared to 22 per cent for their parents’ retirement.

With ever-increasing longevity, a 23-year-old planning to retire at 40, risks falling short of retirement savings. Experts argue that it is inevitable that the retired will be engaged in some income-generating activity. Thanks to their retirement savings, skilled individuals retiring at 40 will not only be able to choose such activities but also allocate the time they desire.

Opportunities from threats:

Thanks to digital disruptions and new opportunities created by them, people with the right skills, including those retiring at 40 will be able to exploit many of them simultaneously. Author Marci Alboher, a leading American expert on career issues and workplace trends, termed this phenomenon as “slash careers” in her book One Person/Multiple Careers: Original Guide to the Slash Careers, where people simultaneously pursue multiple careers resulting in multiple income streams.

The World Economic Forum (WEF) recently estimated the loss of 85 million jobs worldwide from increasing automation between 2020 and 2025.

However, the WEF predicted the creation of 97 million new jobs with re-skilled professionals.

Experts point to the large number of jobs created for DevOps engineers, artificial intelligence specialists, digital marketing managers, talent acquisition specialists and customer success specialists. Thus, with continuous skill upgradation, as Gratton and Scott recommend, early retirees will find new work opportunities.

The other disruptive but helpful development is the rapid growth of the global gig economy. It is increasingly providing opportunities to skilled individuals. Amplifying their impact is the trend of remote working. As mobile applications (apps) and websites bring together providers of skilled services and customers, those retiring at 40 can exploit opportunities across the globe. According to The Economist, a leading British weekly newspaper, there could be one billion location-independent workers by 2035.

Large investment asks:

It is but obvious that retiring early will require large savings and regular investments. The question is, how stiff is the ask? Let us assume that a 23-year-old with a monthly expense of Dh12,000 wants to retire at 40. At 2.5 per cent annual inflation rate, monthly expense rises to Dh18,259 at 40. Assuming a 40-year retired life, same inflation rate and 6 per cent return on retirement savings, more than Dh834,000 is needed at age 40. If he retires at the usual age of 60, his monthly expense would be Dh30,000 on retirement and would need about Dh700,000. Assuming an annual return of 8 per cent, retirement at 40 would entail monthly investment of Dh1,932 while for retirement at 60 it will be just Dh258 per month. Thus, early retirement requires almost 6.5 times extra monthly investment.

A four-fold growth, all thanks to more time:

Retiring at 40 also means less time to save. The monthly investment of Dh1,932 will mean Dh121,611 from returns at the end of 10 years. These returns from 10 years itself will grow to Dh208,419 in the next seven years, a 71 per cent growth. For retirement at 60, after 20 years, the returns are Dh90,047 but at 60, it grows to approximately Dh350,000, a four-fold growth, all thanks to more time.

Inflation and healthcare costs:

Experts term inflation as the biggest threat to retirement savings. However, healthcare costs typically rise faster than general inflation. According to Willis Towers Watson 2020 Global Medical Trends Survey Report, expected medical inflation in UAE was 6.6 per cent. Compare this to general inflation of -2.1 per cent, according to the World Bank.

Bunching up on financial goals post-retirement:

If you retire at 40, many of your major goals, like children’s higher education will happen after retirement. This will leave a lesser amount of pay for current needs..

Retire at 40 action plan: Having grasped the complex challenges of early retirement, you now need to create a “Retire at 40” gameplan.

Its objective:

Create a resilient wealth supply chain that will ensure regular and increasing income that can be invested smartly for consistent growth to create retirement wealth.

Ensure predictability of pay and its growth:

Stick to working for established businesses to avoid income uncertainty and avoid any career breaks.

Get retirement benefits:

Opt for a job with most retirement benefits like gratuity, pensions, among others. Automatic deduction from payroll ensures that progress in retirement savings before you spend a penny. Of course, watch out for pension scheme provisions that restrict the timing of retirement.

Enhance earning potential:

Develop multiple skills to create multiple income streams in retirement. Bano did this as she trained herself in psychology, psychotherapy, and Neuro Linguistic Programming (NLP) before retirement.

Avoid loans:

Do not commit future income to loan repayment. Avoid all loans except for home loans that can be retired well before 40.

Plan for healthcare costs:

Healthcare costs dent your ability to save, and in retirement, devour your savings. Ensure adequate insurance coverage for hospitalisation, disability, and critical illness from regular and top-up health plans.

Create an emergency fund:

To cover uninsurable emergencies, build an emergency fund, ideally three-six months of expenses parked in liquid investments like bank savings accounts, deposits, and short-term debt funds. In case of a new post-retirement career, like Bano, have a bigger fund for up to two years of expenses to cover for any delays.

Plan for retirement housing: Housing costs is a key item in most home budgets. Bano ensured that she had invested in a house before retirement. Of course, with rising demand for location-independent professionals, you might do better relocating to a lower-cost city or country.

Create an investment roadmap:

Create a savings target. We have already illustrated how you can do this. At the same time, account for your spouse’s retirement needs too.

Plan for other goals:

Set savings targets needed for other goals like children’s higher education. Find out whether remaining take home pay can cover current needs. In case of a huge gap, try pushing back retirement by some few years or revisit the idea later.

Diversify investments:

Every asset and investment class have a unique set of risks. If it is volatility for equities, it is inflation and interest rate movement for debt, long-term growth for gold and liquidity for real estate. With a mix of investments across asset classes, ensure that risks from an investment or asset class does not drag down your overall returns.

Consider multi-asset funds:

Consider regular investments through Systematic Investment Plans (SIP) in a multi-asset fund offered by mutual funds. They typically invest in a combination of asset classes such as equity, debt, gold, real estate among others and expertly manage risks. The UAE-based expatriates can also consider options available back home.

Evaluate target date funds:

These funds also invest in a mix of assets and investment classes. They rejig the investments to lower risk, as the target date, in this case, retirement, approaches.

Add index funds and ETFs:

For 100 per cent investment in equities, consider lower risk equity funds such as index funds and exchange traded funds (ETF). They invest in stocks comprising an index they emulate such as S&P 500 in the US and FTSE 100 in the UK and invest in the same proportion as the index.

Consider pension plans:

In the UAE, you are likely to find some life insurance companies offering retirement savings along with life and health covers. Choose market-linked plans for typically high long-term growth from equities. Expatriates can also choose from pension plans in home countries, such as the National Pension Scheme (NPS) for Non-resident Indians (NRIs).

Manage risks:

If you invest in equities yourself, stick to companies with consistent performance track record, established businesses, free cash flows and regular dividend announcements. What not to do? Avoid the latest fads and those promising unreal returns. Remember, premature withdrawals will almost certainly ensure that you will not recover in time to retire at 40.

Boost regular investments:

You can do this with lump sums like bonus, commissions, and stock options. Use the Systematic Transfer Plan (STP) facility where the lump sum is parked in a negligible risk, short-term debt fund, while regular investments are made in existing equity or equity-orientated funds.

Increase regular investments:

Ensure most of the pay hikes help increase regular investments. In mutual funds, you can do it with top-up SIPs. The results can be jaw-dropping. In our example, instead of Dh11,000 per month to save Dh4.75 million by age 40, one could begin with a 40 per cent lower amount of Dh6,500 per month, but with a 10 per cent annual increase. This helps save more than Dh5.63 million at 40 and cross the Dh4.75 million in savings in 15 years and eleven months, almost a year ahead of time.

Periodically review investments:

Ensure periodic progress reviews of your investments. Study impacts of developments like inflation, interest rate changes and market events and compare performance with that of benchmarks and peers. Tweak the investments accordingly.

Rejig portfolio for regular income:

From age 37, gradually move a part of higher risk investments like those in equities and equity-oriented investments to lower risk, debt-oriented investments to secure gains and create regular retirement income. In the year before retirement, re-invest this money in income generating investments like bank deposits, life insurance annuities and Systematic Withdrawal Plans (SWP) of short-term debt funds. Repeat this process periodically to replenish regular income. The clamour for retiring early always existed. People have always sought independence from the drudgery of working just for money. Emerging new realities of longer and active retired lives and unprecedented opportunities in the digital world are now making retiring at 40 a much more achievable dream. Are you ready to have a go?

Names of individuals sharing their experiences have been changed to protect their identities.

Udayan Ray is a personal finance expert and founder, FundooMoney Media, an e-learning company working with India’s leading banking and financial services companies in the area of digital user experience content

• Dubai