Want To Retire At 45? Here’s Our Top Tips & Traps
The idea of retiring early is something that basically everyone aspires to. Maybe not retiring in the sense of watching daytime TV, playing golf and gardening all day long, but definitely in terms of having the financial freedom not to have to work in order to fund living costs.
But saying your financial goal is to ‘retire early’ is kind of like saying your financial goal is to ‘be comfortable’ or saying that your favourite movie is ‘the one with Tom Cruise in it.’ It sounds reasonable, but it doesn’t actually mean anything.
The truth is, everyone has a broad idea in their mind as to what early retirement means for them, and we all tend to assume that other people have the same idea.
For those who’ve seen their parents work very hard for a very long time, the idea of finishing structured employment or self-employment at 60 might seem early. For others who grew up in wealthy or entrepreneurial households, 45 or 50 might seem more on the money.
As with anything to do with your financial situation, there’s no right or wrong answer here. Today though, we’re going to be focusing on the second group. Those who are keen to really push the envelope and become financially independent by their late 40s.
Really anyone with enough long-term planning can retire at age 60. Put away a fairly modest sum of money for a 40-year time period, invest it well, and you should be right on track.
But age 45? That’s a bigger ask. Compounding doesn’t have as much time to work its magic, and it takes some more focus. Generally, individuals who are looking to retire this early are going to be founders who are looking to grow something and cash out big.
It’s definitely doable, but there are some specific financial tips and traps to be aware of in this situation.
The fundamentals of retiring early
Regardless of when you want to retire or how much money you want to have when it happens, there are some key financial tips that are always relevant.
Know your endpoint
Ok sure, this might seem obvious, but you’d be amazed how many people don’t make it past this first step. If you know when you’d like to retire, that’s the starting point, but the next question to ask yourself is ‘how much money will I need each year?’
This stumps a lot of our clients, so a good starting point is looking at what your expenses are right now. Would life look similar as it does now? Then your current spending is a good number to go with.
Realistically though, there are likely to be higher costs. With less time working and more time to fill, there are probably going to be more holidays, more relaxing midweek lunches and more impromptu trips to Selfridges. Sounds pretty good actually.
With that said, we’ve lost count of the times our clients have said some variation of “there’s only so many cocktails you drink at Noon on a Monday.” Invariably, the jump back into the startup world.
Regardless, getting a picture in your mind of your lifestyle can help you put a price tag on it, which is vital for working out your investment and financial plan.
The earlier you start, the better
Even if you have fewer years than usual to meet your goal, it is still very important to start early. The sooner you can start putting money aside into investments, the better. Now for many founders, this is going to raise the first challenge.
Your income or salary will be lower in your own business than it would be working for somebody else, at least at the beginning. This means you’re less likely to have large chunks of cash to put aside on a regular basis.
But even small amounts can add up to big figures down the line. Maybe you can’t put aside £2,000 a month, but even a lower amount of £500 or even £200 a month is a great place to start.
As a very quick example, £500 a month into an investment portfolio at 6% return will equate to almost £300,000 in 20 years' time. If you are able to get that figure up to £2,000 a month, that final number jumps to almost £1.2 million.
Add in some secondaries along the way, and you will be well on your way to achieving financial freedom at an early age.
Unique challenges for founders
With the fundamentals out of the way, we can start to look at some of the specific challenges or unique circumstances that face a founder who's looking to retire before their 50th birthday.
Early cash flow
We mentioned the first one above, which is that their income is likely to be lower in the early years than it would be if they were climbing the corporate ladder.
Yes, it’s important to start early, but £500 a month isn’t likely to lead to retirement at 45. Luckily, many Founders will have the ability to access cash through secondaries, and we often encourage our clients to do just that.
Not only does it allow them to unlock some of the value of their business, it also means they can create a financial parachute for their family. This is great for their personal life but, maybe paradoxically, can also be a huge benefit for their business as well.
If you want to read more, in this article we explain how this can allow founders more freedom to take calculated risks with their company.
In addition to regular monthly investments, larger, ad-hoc lump sums add rocket fuel to an investor's growth plan and can make retiring at 45 a realistic prospect.
Longer drawdown timeframe
Having a shorter time to build up funds is just one of the challenges with early retirement. The other, often overlooked timing issue is the fact that those same funds have to last much longer.
A 65-year-old retiree may need to fund 25 or 30 years of living expenses. A 45-year-old with the same life expectancy will need enough to pay for 45 or 50 years worth.
Obviously, it’s possible to simply ensure there is a big enough investment pot. Some founders will be rewarded with an exit that makes this much more achievable. However, something to keep in mind is that almost all of our clients in this situation continue with some paid work after they ‘retire.’
Opportunities such as sitting on a Board of Directors, holding advisory positions or undertaking consulting work can be low-stress, flexible and often very lucrative.
If you’re looking at the projections and feeling unsure of whether retiring so early is affordable, we’d encourage you to think about these types of roles that might suit you when you’ve finished with full-time work.
Relatively ‘hands-off’ positions can easily generate £50,000 - £100,000 a year, and a low time commitment means many can be held at the same time. More involved and detailed advisory work can bring in well above that.
Early Access
Whenever discussing retirement investing, one of the first accounts that come to mind are pensions. While would-be early retirees shouldn’t ignore them completely, they need to realise that the typical makeup of retirement assets is going to be different from most other people for one simple reason.
They can’t access their pensions.
Not for a while at least. An investor who retires at 45 is looking at 10 years before they’re able to get hold of their personal pension money. That’s not a problem, but it’s also not something to be ignored.
It’s one of the major reasons why the cookie-cutter advice you find online isn’t going to be a fit for many founders. Structuring finances for an unusual situation needs bespoke advice and a tailored approach, which is something that we specialise in at Rosecut.
Some numbers
So just how realistic is retiring at 45? Well, let's look at some numbers. If you want, say, £80,000 a year in passive income, you’re going to need investment capital of around £2m based on the 4% rule.
The 4% rule states that a drawdown of that amount should be sustainable over the long term without dipping into the capital. Honestly, it’s very rough and shouldn’t be relied upon for your actual financial plan (the financial projection tools in our app are much better for that).
For the sake of this article, it will do.
In order to save £2m between the ages of 25 and 45, you’d need to put aside £40,000 a year and bump that up by inflation every 12 months. That’s going to be tough for a 25-year-old, no matter how successful they are.
However, if you take that same 25-year-old and add in a secondary of £250,000 at year 4 and another of £350,000 at year 7, that annual contribution can come down to £10,000 to hit the magical £2m mark.
Looks a bit more achievable, right? Sure, it’s not easy, but it’s worth keeping in mind that it’s not necessary to hit a unicorn valuation in order to reach financial freedom. Relatively modest capital events of £600,000 can set you up for life if it’s paired with a long-term investment strategy.
This can take the pressure off your business decisions and the belief that you need to ‘go big or go home‘.
Top traps
Lastly, there are a couple of key traps to early retirement that are important to be aware of.
Lifestyle inflation
This is the most obvious one. As you start to earn a little more money, you slowly upgrade your lifestyle. Eat at nicer restaurants, stay at nicer hotels, and buy nicer clothes. These aren’t even necessarily dramatic changes, but small incremental expenditures across lots of areas of your life can add up.
Now we’re not saying you shouldn’t enjoy your life now, as well as investing for the future, but it is important that you do both. So when your income goes back, make sure the amounts going into your investments go up too.
Poor investment selection
How many times have we heard stories about millionaire footballers going bankrupt? Sure, lifestyle inflation is a big part of this, but there’s invariably also some sort of mismanagement of investments.
Unregulated investment schemes, high-risk property developments, crypto, marginal business ventures - the list goes on and on.
Simply put, avoiding major wipeouts to your investment pot is essential to long-term financial security.
No cash buffer
In a similar vein, even good investments can go through rough spots. And the worst situation is having to sell down these good investments at a bad time. Running your lifestyle with no cash reserves means you could be faced with being forced to sell down assets at a loss to cover an unexpected bill.
We recommend only keeping 3-6 months in cash (or maybe 12 if your situation is a bit uncertain), but even this relatively modest amount will allow you to get through any short-term issues that might crop up without raiding your financial freedom fund.
Financial Tips for Retiring at 45
Define your end goal. What does retirement look like for you? Will your lifestyle be significantly different? Will you work on an advisory or ‘passion’ basis?
Put a number on that goal. When you have the picture in your head, you can put a price tag on it. What will that lifestyle cost you? Our free app has tools that can help narrow down what your future finances might look like, which can help define the number you’re aiming for.
Create a specific plan. Not a template off a random online article or a Reddit post, but a plan that takes into account your unique circumstances and objectives. Rosecut can help with that, and we can have an initial discussion about the process at no cost to you. Book a call today.
Start early. It’s never too soon to start an investment plan. Even modest regular contributions can make a big difference over the long term.
Invest lump sums where possible. Whether it’s taking secondaries, selling your business to start a new one or something else entirely, accessing capital lump sums is what’s going to make the difference between a comfortable retirement at 60 or an early one at 45.
