Dreaming of spending your days golfing or gardening while others your age are still far from retiring? You’re not alone - early retirement is a popular topic across online forums and millennial-focused communities. But figuring out how to retire at 45 takes determination and thoughtful planning.
Someone in good health could live another 30 to 45 years after their mid-40s, which means you’ll need a strong investment approach to help reduce the chance of running out of money.
Understanding What It Takes to Retire Early
The general guideline for retirement withdrawals is to take no more than 4% of your savings in the first year, then adjust that amount for inflation each year. If you're planning for a long retirement, consider a slightly lower withdrawal rate.
To estimate how much you'll need saved, start by identifying your expected annual expenses in retirement. This can feel challenging if you're still young, but a retirement calculator can help you total projected costs, such as:
- Housing
- Food
- Utilities
- Loan payments
- Hobbies and lifestyle spending
Health care will likely be one of your largest expenses, even in your late 40s or early 50s. Near-term costs include:
- Health insurance premiums
- Out-of-pocket expenses (deductibles, coinsurance)
Because most people aren’t eligible for Medicare until age 65, you may need to shop for coverage on an insurance exchange. Long-term medical needs should also be part of your planning. These can include caregiver support or assisted living later in life. Current average costs include:
| Type of Care | Average Cost |
|---|---|
| Home health aide | About $35 per hour2 |
| Nursing facility (private room) | About $9,034 per month3 |
If you expect to purchase long-term care insurance to help with these future needs, include that cost in your planning and remember to account for inflation.
Estimating Your Savings Goal
Suppose you add up your potential expenses and figure you can live off $50,000 a year from your investments in your first year of retirement. (Our Retirement Cost of Living Calculator can help you do the math.) If you use the 4% withdrawal rule, you'll need 25 times your annual expenditures to avoid over-withdrawing your accounts over time, although this does not take into consideration market volatility, inflation or any taxes and fees on the account.
So, even with that modest budget, you'd have to save a hefty $1.25 million to stay afloat. As you typically can't pull money out of a 401(k) until you reach age 59½ without incurring penalties, saving aggressively is a necessity.
Regardless of your projected retirement budget, you'll want to calculate the necessary amount of funds you'll need using the withdrawal rate with which you're comfortable.
Making Early Retirement Work
Obviously, any illustration like the one above is only intended to give you a ballpark idea of what you would need saved in your retirement account. There are any number of factors that may alter your projections, including:
- Other sources of income in retirement, including a spouse's wages or a pension
- Your health condition and expected lifespan
- Your willingness to supplement investment income with part-time work
- Your assumptions about the market's future performance
So, if you're still wondering how to retire at 45, you'll want to take all of those variables into account. Discussing the implications with a financial professional could potentially give you a little extra reassurance before taking the plunge.
For those who aren't extremely high income-earners, reaching your savings goal by that age likely requires severe penny-pinching early in your career, matched with extremely robust retirement contributions. It may not be easy, but it isn't impossible.
Conclusion
Early retirement takes thoughtful planning, steady saving, and a clear picture of what your future expenses may look like. By running the numbers and adjusting your strategy as life changes, you can build a path that supports your long-term financial goals. If early retirement is your dream, taking practical steps now can help you move toward it with confidence.
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Sources
- Ageing and health. https://www.who.int/news-room/fact-sheets/detail/ageing-and-health.
- Senior In-Home Care Costs. https://www.seniorliving.org/home-care/costs/.
- How to Pay for Nursing Home Costs. https://health.usnews.com/best-nursing-homes/articles/how-to-pay-for-nursing-home-costs.
