At a time when many Americans are wondering not when, but if they will retire, is the notion of retiring early dead? Hardly. Even as late at 45 you could still say a grand goodbye to the 9-5 by 60. Doing so won't be easy, and will be a lot of work, but then of course you'll have eternity to get your groove back. Here's how to buck the trend and at 45 to start position yourself for a 15 year end-date.
Know your numbers. What will you need to retire? How much do you need to save? Assume a conservative rate of return and inflation, which is easy to do with calculators that you can find online. Do a "gap analysis" before pulling the trigger on retirement. Many people retire too early, only to find they need to return to work. A gap analysis can help you determine if there is a gap between your expected retirement income and expenses, says David Potter, a spokesperson for The Hartford.
Take for example, Jim, a 45 year-old who estimates he will have $3,500 in monthly expenses during retirement. If he has $100,000 saved in a conservative, short-term portfolio, yielding around 1.25%, at age 60, he would need approximately $850,000 to support an income stream of $3,500 per month. However, by age 60, investing short-term produced only around $125,000. Even with social security kicking in at 62, he would not be prepared for retirement, explains Mark Davis, senior vice president, Retirement Solutions, SunTrust Wealth & Investment Management.
Then there's Sally, 45, shooting for 60 too, with an estimated $3,500 in monthly expenses during retirement. She already has $500,000 in a portfolio evenly split between equities and bonds. Sally could have $1.1 million by 60, which would be adequate to cover her expenses. Even in poor markets, she could have about $774,00 which comes close to what she needs, says Davis.
Save systematically and keep it saved. Out of sight, out of mind. Understand the power of compounding returns and use "dollar cost averaging" to automatically buy more shares of something when it is priced lower and less when it is priced higher. Max out your 401k and IRAs. Understand the impact of taxes. Take advantage of every opportunity to tax deduct, tax defer and create tax-free retirement such as Roth IRAs.
Seek appropriate asset allocation and diversification. It's important to rebalance, typically twice a year, or as needed, to be sure your asset mix is consistent with returns needed, risk toleranace and your time horizon goal. With 15 years or more to go before you need your retirement savings, it doesn't make sense to have everything invested in fixed income or cash, says financial coach Kelley Long.
Understand the certainty of uncertainty. Plan for contingencies by having the correct amount of money in four areas -- cash reserves, insurance, fixed and equity assets. Having enough cash reserves can help you avoid forced selling of equities at a loss when markets are down because of a job change or income loss, says Peter Velardi, president of the educational website FiPath.com.
Do away with debt. In the best case scenario you should pay off your mortgage prior to retirement. Simply adding to your monthly payment will accelerate the timing of your mortgage burning party says Klea Theoharis, managing director at the investor relations firm Crescendo Communications. Strive to be rid of credit card debt. Spend wisely. If you haven't been a stickler for budgeting, it's time to change, otherwise you can kiss you early retirement dreams goodbye.
Anticipate obstacles. There are any number of risks to your early exit. Consider health care costs. Don't forget about health care coverage and affiliated costs required to bridge you from 60 until you reach Medicare age. Studies put the price tag of health care in retirement in the hundreds of thousands, says JJ Montanaro, a certified planner with USAA. Other threats include unexpected illness or disability; early job loss; inflation: rates higher than 2-4% could prove problematic; extraordinary low fixed-income yields that penalize savers; rising tax rates as governments attempt to close fiscal deficits, and stagnant real estate prices are just a few, points out Albert Lu, managing director of WB Advisors.
Life begins at retirement. Don't you want it sooner, rather than later?