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How to achieve financial independence by the age of 45

Jul 29, 2019
How to achieve financial independence by the age of 45

Port Elizabeth - Financial independence may seem like a far-fetched dream for many, however it’s a dream that can be achieved and is possible, if guided by clear goals with a clear plan. Setting clear goals will help you to keep track of where you have been, where you are, where you are going in terms of your financial independence journey.

What is financial independence?

Financial independence is the complete freedom to be the best, most powerful, energetic, happiest and most generous version of yourself that you can possibly be. In real life, the majority of people are in jobs they genuinely do not enjoy and which they would immediately quit if they didn’t need money/income.

The financial independence journey is a dream that many would like to achieve, however, it can prove challenging. It’s important, first and for most to understand the required amount of money needed from day one to reach the age of 45 and financial independence. The amount will be determined by the lifestyle anticipated from day one of you earning a salary or income.

How much is enough?

The general rule of thumb is to strive to replace 80 percent of pre-retirement income. This is normally the target amount set to maintain the same lifestyle at retirement. Now if the target is to do this at age 45 - most retirement benchmarks are based on traditional retirement age of 60 and above.

These benchmarks will not be effective if you seek financial independence at age 45 as some vehicles such as retirement annuities are only accessible at age 55. The truth of the matter is that if you are looking at financial independence at 45, you will not necessarily be looking at your pension. 

In order for you to be able to walk away and be financial free, it’s important to focus on eliminating problematic debt, cutting down in living expenses and having an above average savings to income ratio.

Here are some additional tips to achieve financial independence at age 45:

Get advice

Certified financial advisors can help you to make sound investment decision around early retirement. Financial advisors are able to take unique circumstances into account to determine the capital required at age 45.

Earn, save and invest money

The key to achieving financial independence is to save as much money as possible in the right places with the right asset allocation. Ultimately it’s important to focus on saving most of the money you earn and investing for a long period to benefit from compound interest. 

Diversification is key here. Have a clear realistic target amount in mind which will help you to stick to the financial plan and motivate you should you fall behind.

Living expenses

The ability to save is strongly influenced by the lifestyle choices that one makes. Your current living expenses before financial independence must fit your future desired lifestyle at age 45. It’s important to focus on minimalism and cutting down on living expenses.

The focus here can be on acquiring life experiences as opposed to buying expensive properties and buying new cars every three years. Getting used to utilizing a small amount of income will assist in the future as your income replacement will be lower yet with a comfortable lifestyle.

Eliminate high interest debt

It’s important to understand that maintaining a low debt-to-income ratio is imperative for the independence to be achieved. Individuals aspiring to reach this goal must eliminate high- interest debt such as credit cards and personal loans.

Lower debt obligations at age 45 will assist to free up income for basic needs and lifestyle expenses. It’s vital to understand that becoming debt free before age 45 will be the ultimate goal however one must also understand that manageable debt obligations such as bond payments for rental and investment properties are an exception if debt payments are low.

A debt-to-income-ratio of 20 percent should be the guideline if age 45 is the plan. If you can, “avoid debt like a plague”.

Pay attention to tax

Tax can erode your savings, it’s important to invest in tax efficient ways. Consider options such as tax free investments and investments that can grow your money tax free or with minimal tax. Seek clear guidance from Financial advisors around tax implications for each investment vehicle.

Cut subscription services that you don’t use

Get into the habit of freeing up your money. Cancel subscription to the magazine you never read, the gym membership if you haven’t been to gym since January. Consider becoming one of the many people who run/jog/cycle and who stopped watching pay TV channels to save more.

Have a contingency plan

The truth of the matter is that you can’t control risks associated with early retirement and the global issues around currencies and economic meltdown. Its integral to have a contingency plan and speak to a financial advisor to stress test your portfolio against various scenarios. Always plan for the unexpected.

Review and update regularly

Revisit and update the plan at least once a year with your financial advisor to make sure that your portfolio is aligned to your goals and to stay on track.

Don’t forget to invest in yourself

Lastly in the journey to financial independence, remember that true happiness comes from within and not necessarily from being rich. On the rocky road towards the independence also work on yourself and live a life full of purpose, intention and gratitude.

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