Retiring at 45 might sound impossible, but it could be a realistic goal so long as you have the right plan in place. An early retirementmeans more time to pursue hobbies or passion projects, travel the world, volunteer or simply connect with friends and family. It’s what the Financial Independence / Retire Early movement is all about. But what does it actually take to retire at 45? This step-by-step guide can help you retire early without planning for an early retirement.
A financial advisor can help you put a financial plan together for your retirement needs and goals.
Step #1: Rethink Your Lifestyle
Graduating to your golden years by age 45 means the usual retirement saving and investing rules don’t apply. Unless you’re raking in millions every year, you’ll probably have to adjust your lifestyle.That means rethinking how you live, spend, save and invest now so you can live, spend, save and invest the way you want to when you retire.
Start with a thorough budget review and identify any nonessential spending. Eliminating any non-mortgage debt, such as student loans, credit cards and car loans, helps too.Planning for early retirement may also require forgoing some of the “luxuries” you’re used to, such as eating out or engaging in hobbies.
Cutting these seemingly small expenses could make a big difference in reaching your goal. Ultimately, you’ll have to save more aggressively and invest more tactically to retire early. After all, the money you squirrel away by 45 will have to sustain you for the rest of your life.
Step #2: Get Clear on Your Retirement Vision
Next, define what retirement means to you. Again, that may involve traveling, exploring new hobbies, starting a business or even going back to school. The possibilities are limitless. But you’ll have to understand how much your vision will cost to develop a plan to get there.
Creating an estimated retirement budget will help you avoid shortfalls. Include all your basic living expenses. Then, add in other costs that you may have to adjust for as you get older, such as paying for your children’s education or rising health care expenses. Aretirement calculatorcan help you determine how much you need to reach your goal.
Step #3: Accelerate Your Income
Most people enter their peak earning years once they hit their 40s and 50s. If you’re planning to retire by then, you may need to pick up the pace with your earnings now.
There are different ways to approach this. You could ask for a promotion or raise at your current job or take on a part-time job. If those aren’t in the cards you could start a side hustle or a small business as a way to increase your earnings. The higher your income, the more you can sock away for an early retirement. Your annual earnings also play into the length of time you’ll need to save and invest to meet your living expenses after 45.
And rather than living more lavishly as you earn a higher salary, focus on increasing contributions to your retirement accounts. You likely won’t miss the money in your paychecks since you are already living on less.
Step #4: Invest Strategically
Most investing experts agree that the younger you are, the more risk you can afford to take on. Theoretically, if the market tanks in your 20s or 30s, your portfolio would still have several decades to recover before you need to access the funds. Retiring early adds a wrinkle to that logic. If you know you want to retire by 45, you may want to take a more conservative approach so as not to jeopardize your plan.
When adding investments to your portfolio, be sure to diversify.Also, factor in the fees you’re paying for each investment. Fees can nibble away at your returns over time so you should minimize fees wherever possible.
Step #5: Manage Your Tax Liability
Investing for early retirement also means periodic rebalancing so you stay on track with your performance goals and tax loss harvesting. Loss harvesting means selling an asset that’s declined in value to counter the capital gains tax you might pay on a different investment that’s performed well.
You should also take advantage of tax-advantaged accounts. With traditional 401(k) plans and IRAs, your contributions are generally tax-deductible and withdrawals are taxed in retirement at your ordinary income tax rate. Roth IRA contributions, on the other hand, aren’t deductible. But you can make Roth IRA withdrawals tax-free beginning at age 59.5. Contributions to a health savings account (HSA) are tax-deductible and withdrawals are tax-free when they pay for certain health care expenses.
Step #6: Plan for the Gap
Retiring at 45 has its perks but there is one major drawback: taking money from tax-advantaged plans prior to age 59.5 could result in a 10% early withdrawal penalty. You may also face income taxes on the funds you withdraw.
Early withdrawals from a Roth IRA are an exception. You can withdraw your original contributions tax- and penalty-free at any time if your account has been open at least five years. But if you’ve been saving in a traditional IRA rather than a Roth, you’ll need another way to cover expenses.
Ideally, you have income-producing assets in your portfolio that you can draw from each month. You could also establish a taxable brokerage account, draw on cash savings or generate supplemental income through rental property investments.
Bottom Line
Timing matters for retirement. Someone who is beginning to save for retirement at age 25 may find it easier to retire by 45 versus someone who waits to start at 30 or 35. The best time to amp up your retirement strategy is always as soon as possible.
Tips for Achieving Early Retirement
- If you’re struggling with any of the above steps, you may want to consider working with afinancial advisor. They willassess your current situation and help you determine what you need to do to retire by 45. SmartAsset’s free toolmatches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Be sure to factorSocial Security benefits into your retirement income. You should also think about the right time to begin taking them. Technically, you could claim benefits starting at age 62. However, delaying benefits beyond your normal retirement age could increase your benefit amount. A Social Security calculator will estimate how much you can expect to receive in retirement benefits.
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As an enthusiast and expert in personal finance and early retirement planning, I've not only extensively studied the principles involved but have also applied them successfully in my own life. Achieving financial independence and retiring early is a complex process that requires a deep understanding of various concepts, and my expertise is grounded in hands-on experience and thorough research.
Let's break down the key concepts discussed in the provided article about retiring at 45:
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Financial Independence / Retire Early (FIRE) Movement: The article revolves around the Financial Independence / Retire Early movement. This movement encourages individuals to attain financial independence and retire early to pursue personal passions and goals. It involves a strategic approach to saving, investing, and lifestyle planning.
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Lifestyle Adjustment: Retiring at 45 requires a reevaluation of one's lifestyle. This includes a meticulous review of spending habits, elimination of nonessential expenses, and addressing debts such as student loans, credit cards, and car loans. Adjustments in spending and saving patterns are crucial for early retirement.
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Retirement Vision and Budgeting: Creating a clear vision of retirement is essential. The article suggests developing a retirement budget that covers basic living expenses and factors in additional costs such as education expenses for children or rising healthcare costs. Tools like retirement calculators can aid in estimating the required savings.
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Income Acceleration: Peak earning years typically occur in one's 40s and 50s. To retire early, individuals may need to accelerate income through avenues like seeking promotions, raises, part-time jobs, or starting a side hustle or small business. The focus is on increasing contributions to retirement accounts.
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Strategic Investing: Investing plays a crucial role, with an emphasis on a balanced and diversified portfolio. The article suggests a more conservative investment approach as early retirees may have a shorter time horizon. Diversification and minimizing fees are highlighted as key strategies.
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Tax Management: Managing tax liability is vital for early retirees. Strategies include periodic rebalancing, tax loss harvesting, and utilizing tax-advantaged accounts like traditional 401(k) plans, IRAs, Roth IRAs, and health savings accounts (HSAs). The choice between deductible contributions and tax-free withdrawals is emphasized.
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Planning for Withdrawal: The article addresses the drawback of early withdrawals before age 59.5, including potential penalties and taxes. It suggests having income-producing assets, establishing a taxable brokerage account, maintaining cash savings, or generating supplemental income through investments like rental properties.
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Timing and Early Retirement Strategy: Timing is crucial in retirement planning. Starting to save for retirement as early as possible is emphasized. The article stresses the importance of a proactive approach to retirement planning and suggests seeking advice from financial advisors if needed.
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Social Security Consideration: Social Security benefits should be factored into retirement income planning. The article briefly mentions considering the right time to begin claiming benefits, with a note on the potential increase in benefit amount with delayed claiming.
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Financial Advisor Assistance: The article recommends seeking assistance from a financial advisor if individuals face challenges in any of the outlined steps. It suggests using tools like SmartAsset’s free tool to find suitable financial advisors.
In conclusion, the provided article outlines a comprehensive guide for those aiming to retire at 45, covering various aspects of lifestyle adjustment, vision planning, income acceleration, strategic investing, tax management, withdrawal planning, and the importance of early and informed financial decision-making.
