Age 65 has traditionally been viewed as the standard retirement age. It's when people become eligible for Medicare, and it was the original full retirement age (FRA), at which people are eligible for their full Social Security benefits.
Still, it is possible to call it quits earlier than that, and there are even tools to help. For instance, you can start taking penalty-free withdrawals from your IRA as early as 59 1/2, and you can even get at your 401(k) as early as 55 if you retire at that age from the employer that sponsors it. Retiring even earlier than that takes dedication and planning. But with sufficient foresight, it might be possible to retire even as early as age 45.
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How to get retired fast
To retire that early, you need to keep your costs down, get your income up, and save and invest aggressively, starting at a pretty young age. The table below shows how much you need to save each month to end up with $1 million by age 45, depending on what age you start at and what rate of return you earn along the way:
|
Starting Age |
Monthly Savings at 10% Annual Return |
Monthly Savings at 8% Annual Return |
Monthly Savings at 6% Annual Return |
Monthly Savings at 4% Annual Return |
|---|---|---|---|---|
|
18 |
$607.64 |
$876.13 |
$1,239.85 |
$1,718.75 |
|
20 |
$753.67 |
$1,051.50 |
$1,443.01 |
$1,945.04 |
|
22 |
$938.48 |
$1,267.86 |
$1,688.47 |
$2,214.17 |
|
25 |
$1,316.88 |
$1,697.73 |
$2,164.31 |
$2,726.47 |
|
27 |
$1,665.10 |
$2,082.96 |
$2,581.62 |
$3,168.64 |
|
30 |
$2,412.72 |
$2,889.85 |
$3,438.57 |
$4,063.55 |
|
33 |
$3,617.45 |
$4,157.86 |
$4,758.50 |
$5,421.95 |
|
35 |
$4,881.74 |
$5,466.09 |
$6,102.05 |
$6,791.18 |
Table by the author
If you start saving aggressively right out of trade school or college and earn returns about in line with the market's long-run average (near 10%), then a $1 million nest egg by 45 may be in reach. Wait too much longer to start saving, and the amounts you have to sock away each month grow rapidly. Begin much past age 30, and that million-dollar nest egg becomes unreachable by age 45 without either a huge amount of savings or substantially more luck than you have any reason to expect.
Why you'll probably need at least $1 million
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While someone at a typical retirement age may be able to retire comfortably with less than $1 million, it's tougher for an early retiree to do so. There are two key reasons for this. First, as an early retiree, you don't have Social Security or Medicare, and those key programs help cover costs that you'll be responsible for on your own. Second, because you'll be retiring decades earlier than is standard, you'll have to plan for your portfolio to cover your costs that much longer.
Even then, a typical retirement planning guideline indicates that a $1 million nest egg will only be able to provide about $40,000 in annual spendable money if you're at all worried about inflation. And even with that large a nest egg to start with, it's not certain that you'll be able to make it last for a retirement that could be a half-century long. To make it comfortably, you'll probably want even more than $1 million, but that means starting earlier or saving all that much more aggressively.
The key to making it work: low costs
That it takes $1 million to deliver around $40,000 in annual spendable money that has a chance to keep up with inflation should tell you how important it is to keep your costs down on this journey. It's key to freeing up the cash to invest and build that substantial nest egg. Also, the higher your costs are, the larger your nest egg needs to be to cover them, which just goes toward making your target even higher.
Another thing to consider is that under the Affordable Care Act, if you buy your own health insurance, your out-of-pocket premiums are scaled down based on your income, up until a point. Once your income exceeds 400% of the poverty level, you are no longer eligible for a subsidy to help cover those costs. That's another reason to keep your costs down once you've reached your early retirement target; having high income to support high expenses likely means higher health insurance premiums as well.
What you get at the end: more time
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It takes a lot of planning, work, and sacrifice to be able to call it quits at age 45. Still, the prize at the end of all that is an extra 20 years of your life that you can put toward whatever you want. Spend it with your family. Spend it with your friends. Spend it volunteering with a charity that you feel strongly about. You can even spend it working, if you'd like (but if you do, make sure that, like Warren Buffett, you're working at a job you love).
Indeed, perhaps the most powerful benefit you get by reaching that million-dollar milestone by age 45 is the flexibility to better choose your own path. With a decent nest egg, you're not beholden to working to service your debts, or to a high-paying job just because of the salary. That sense of freedom is yours to keep even if you reach 45 with that million-dollar nest egg and choose to continue to work. Ultimately, that might be the best reason of all to try to get yourself retirement ready by 45.
