How Do I Retire by 45

By | December 18, 2013

Retiring early is a dream that most people wish for in the future, but first it is important to do the math to see if early retirement is feasible.  Early retirement is not achievable without a) earning top 5% income among the nation or b) decisive budgeting and investing in key investments. For most people, earning among the top 5% in the nation is simply not feasible so for most, saving and investing is the key to early retirement. I will also add, being a small business owner, entrepreneur, or fulltime investor is the best way. If you seriously want to know how to retire by age 45 then skip to the bottom of the article and I will show you.

What-Is-Common-Stock-Dividends

The Normal Retire Plan: Build a BORING financial life. 30% fixed income, 30% into Real Estate (home and rental property) 40% in the stock market. Over time that break down produces 8-11% per year. 30-30-40.

Make sure you max out your 401k and roth ira. You want to leverage your time and tax free savings using compound interest. If you want to see the power of compounding returns check out this article I wrote about the power of compounding returns.

If you saved early in your 20’s and have accumulated $100,000 by 30 (compare it to a 30 yr old who just started saving $8,000 a year), then you are set for your retirement, as taken from the chart in the article The Power of Compounding Returns:

Rate of Return 8%
Age Contribution
22  8,000  8,640 22  –  –
23  8,000 17,971 23  –  –
24  8,000 28,049 24  –  –
25  8,000 38,933 25  –  –
26  8,000 50,687 26  –  –
27  8,000 63,382 27  –  –
28  8,000 77,093 28  –  –
29  8,000 91,900 29  –  –
30  8,000 107,892 30  –  –
31  – 116,524 31  8,000  8,640
32  – 125,846 32  8,000  17,971
33  – 135,913 33  8,000  28,049
34  – 146,787 34  8,000  38,933
35  – 158,529 35  8,000  50,687
36  – 171,212 36  8,000  63,382
37  – 184,909 37  8,000  77,093
38  – 199,701 38  8,000  91,900
39  – 215,678 39  8,000  107,892
40  – 232,932 40  8,000  125,164
41  – 251,566 41  8,000  143,817
42  – 271,692 42  8,000  163,962
43  – 293,427 43  8,000  185,719
44  – 316,901 44  8,000  209,217
45  – 342,253 45  8,000  234,594
46  – 369,634 46  8,000  262,002
47  – 399,204 47  8,000  291,602
48  – 431,141 48  8,000  323,570
49  – 465,632 49  8,000  358,096
50  – 502,882 50  8,000  395,383
51  – 543,113 51  8,000  435,654
52  – 586,562 52  8,000  479,146
53  – 633,487 53  8,000  526,118
54  – 684,166 54  8,000  576,848
55  – 738,899 55  8,000  631,635
56  – 798,011 56  8,000  690,806
57  – 861,852 57  8,000  754,711
58  – 930,800 58  8,000  823,727
59  – 1,005,264 59  8,000  898,266
60  – 1,085,685 60  8,000  978,767
61  – 1,172,540 61  8,000  1,065,708
62  – 1,266,343 62  8,000  1,159,605
63  – 1,367,651 63  8,000  1,261,013
64  – 1,477,063 64  8,000  1,370,534
65  – 1,595,228 65  8,000  1,488,817
66  – 1,722,846 66  –  1,607,923
67  – 1,860,674 67  –  1,736,556
68  – 2,009,528 68  –  1,875,481
69  – 2,170,290 69  –  2,025,519
70  –   2,343,913 70  –   2,187,561

 

Let’s say if you have contributed to your roth ira from age 25 to 60 assuming an 8% return, you would have accumulated $1,000,000! I have taken this chart from the article Easiest Way to Make a Million Dollars:

Age Contribution Total Rate of Return
25 $5,000 $5,400 8%
26 $5,000 $11,232
27 $5,000 $17,531
28 $5,000 $24,333
29 $5,000 $31,680
30 $5,000 $39,614
31 $5,000 $48,183
32 $5,000 $57,438
33 $5,000 $67,433
34 $5,000 $78,227
35 $5,000 $89,886
36 $5,000 $102,476
37 $5,000 $116,075
38 $5,000 $130,761
39 $5,000 $146,621
40 $5,000 $163,751
41 $5,000 $182,251
42 $5,000 $202,231
43 $5,000 $223,810
44 $5,000 $247,115
45 $5,000 $272,284
46 $5,000 $299,466
47 $5,000 $328,824
48 $5,000 $360,530
49 $5,000 $394,772
50 $6,000 $432,834
51 $6,000 $473,941
52 $6,000 $518,336
53 $6,000 $566,283
54 $6,000 $618,065
55 $6,000 $673,990
56 $6,000 $734,390
57 $6,000 $799,621
58 $6,000 $870,071
59 $6,000 $946,156
60 $6,000 $1,028,329

 

The Real Way To Retire by Age 45: So above is my proof showing how powerful compounding returns can be, but how can one retire by age 45? One way is through obtaining streams of passive income so that all of your expenses are covered. Any excess net will be carried over to be invested in a retirement account. A good source of investment income if you have little capital is through multifamily apartments. Real estate has many advantages, them being leverage, tax advantage, cash flow, and tenants paying down mortgage. Depending on what geographical location you live, such as the south or the midwest, the cap rates for investing in such areas can be quite high. For example in jefferson park, a neighborhood in Chicago, I was looking to purchase a 6 unit apartment building for $600,000. With a downpayment of $100,000 and average rent per unit being $1,000 for a 2bd/2bath, that would be monthly rental income of $6,000. After all expenses, I calculated a conservative rental income of $2,000/month. A couple more of those type of real estate investment deals and you have just built enough rental income to meet all of you daily living expenses!

making-money-from-investing-in-stocks

The Long Term Strategy: While it is great to have real estate and use other people’s money ( the bank and the tenant) to obtain and pay off the mortgage, dealing with tenants, toilets, and trash can be quite tiring. Once you have a portfolio of real estate cash flowing more than $10,000/month, managing all of those investments can be stressful and you may want to get out of those investments to fully enjoy your retirement. The long term strategy is to eventually sell the real estate buildings (at the right price) and invest in bluechip companies that pay a large dividend. Think consumer durables such as Walmart, Johnson & Johnson, or Coca-Cola (Check out my stock portfolio to get an idea: Money Tree Portfolio). Once you have more than $1.2 million dollars in these kinds of dividend paying stocks, you will receive about $3,000/month (initially, but the dividends will increase year over year as companies on the money tree portfolio list tend to increase their dividends). As for tax implications, dividend income is taxed at 15% which is better than the 33% a worker gets taxed (so the rich get richer, check out the things that prevent you from getting rich). So the final way to receive passive income is through dividend paying stocks. If you want to go safer, then invest in municipal bonds.

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