Young Couples: 3 Simple Steps to Retire by 45

If you plan your finances right and save enough money, you and your spouse can retire early and enjoy the rest of your lives on your savings and investments.

Retiring early and spending the rest of your life with your loved ones is everyone’s dream unless you’re a workaholic. But there’re a vast difference between early retirement and comfortable early retirement.

A comfortable early retirement relies heavily on your financial strength. If you’ve saved up enough for a decent revenue stream in your retirement years, you may get to enjoy a comfortable life after retirement.

If your retirement fund can’t carry you through the next four decades at least, don’t even think about retiring in your forties. So how do you build up such a substantial retirement fund by 45?

Here are three easy steps:

Vigorous saving

If you are planning an early retirement, your saving rate must be way higher than the average. You have to understand that such an early retirement has two main problems.

You will have less time for saving and building wealth than people who retire at 71, and you will be living on your savings for a much more extended period — at least 40 years.

So shed your previous saving habits of 15-20% of your income and instead aim for 50% or above. It might seem like a brutal sum to save, but that’s the price you will have to pay now for a good life later on — and it’s not impossible.

With some financial discipline and cutting some unnecessary costs, a couple can save up to 50%, without living hand to mouth. Increasing your income is an excellent way to save more while living in relative comfort.

Let’s say that you and your spouse make $120,000 a year. And you are saving half of it, which amounts to $60,000 a year. If you have started planning your early retirement at age 25, you can easily save 1,200,000 by age 45.

Use tax-advantaged accounts

It’s always smart to save your money in a tax-advantaged account. They serve as amazing investment vehicles, as well as tools for compounding growth. Ideally, you should go for a combination of TFSA and RRSP – the two best tax-advantaged accounts.

As a couple, you will have a combined contribution limit of $12,000 a year in your TFSA, and up to $53,000 in RRSP, more than enough to stash away your savings. The dividends and capital gains you earn in these accounts will be tax-free and tax-sheltered.

Invest

Your best chance to grow enough wealth for early retirement is with investments. Even the best interest rates won’t be able to match your investment in a safe, trustworthy, and growing dividend stock.

It’s also the fastest-growing bank in the Big Five, with a five-year market value growth of 35%.

While you can build considerable wealth just with your yearly savings and the dividends, it might not be enough for a couple for four decades. But if you count in the capital gains as well, you may have a sizeable enough nest egg for the next 40 to 50 years.

Foolish takeaway

While early retirement may seem like a far-fetched dream to those earning below a certain point, it’s not impossible. You will have to work much harder and show much more restraint with your spending, than other people your age, but that’s not a bad trade-off for a carefree early retirement by 45.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

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