When you search online for “early retirement,” you’ll come across countless articles and stories of people who managed to save aggressively and stop working well before they hit 40.
But for most of us, our retirement goals are a bit more down-to-earth. According to a recent survey, Americans who haven’t retired yet but plan to do so intend to say goodbye to full-time work at around age 57, on average. While that’s still considered early retirement, it’s a whole decade before the standard Social Security retirement age of 67. The good news is that you can achieve this without having to severely cut your expenses. Here are five steps to help you retire a decade ahead of the typical retirement age.
Save more
The sooner you aim to retire, the more money you’ll need to set aside. Typically, experts advise saving about 10% to 15% of your income before taxes for a regular retirement. For instance, let’s say you’re 22 years old and earn $40,000 annually. If you save 10% of that income, earn an average of 6% yearly on your investments, and plan to retire at 67, you could have around $1.13 million by the time you retire. This should be enough if you plan to spend 70% of your pre-retirement income each year during retirement and expect to live until you’re 85. (These calculations are based on our retirement calculator, which considers 2% salary increases per year, 3% annual inflation, and a 5% return on investments after retirement.)
However, let’s say you want to retire at 57 under the same conditions. In this case, you’d only have approximately $570,000 saved up when you retire. That might not be sufficient to cover your expenses without making significant lifestyle adjustments in your later years. According to the calculator, if you intend to retire at 57, you’d need to save more than double the amount, roughly 22% of your pre-tax income each year.
This is a substantial difference, but if you’re planning on retiring early, it’s crucial to spend less and start saving earlier in your career. Doing so allows your money more time to grow and work for you.
Know your number
The survey reveals that over 1 in 5 Americans (22%) admit they’re not sure how much money they’ll need to have a comfortable retirement. While a general guideline is to aim for 70% of your pre-retirement income, you can adjust this based on your specific situation. For example, if you manage to pay off your mortgage before retiring, you might not need as much. On the other hand, if you have ambitious travel plans for your retirement, you might require more funds.
To figure out the right retirement savings goal for you, consider using a retirement calculator or consult with a financial advisor. This way, you can tailor your retirement plan to fit your unique needs and circumstances.
Distribute appropriately.
It’s a common suggestion to adjust your investments to be safer as you get closer to retirement age. However, if you plan to retire early, you’ll have a longer retirement period, which usually requires a more daring investment strategy. You want your invested money to continue growing. While it’s technically possible to retire with an all-stock investment approach, it’s generally wiser to have a mix of assets, including stocks, bonds, and cash. This way, your retirement plans won’t be derailed by a sudden drop in the stock market.
A smart approach could involve keeping a significant portion of your investments in stocks (being more aggressive) while also putting aside a few years’ worth of spending money in cash or safer investments. This way, you’ll have a cash reserve to cover your expenses for the initial years of retirement, and you won’t have to dip into your investments if the market experiences a downturn or becomes volatile.
Comprehend the regulations regarding withdrawals
Retirement accounts come with special tax benefits, but they also come with rules about when you can access your money. For example, if you take money out of a 401(k) before you’re 59 ½ years old, you might have to pay a tax penalty (though there are exceptions to this rule). Similarly, you can’t start receiving Social Security benefits until you turn 62, and if you claim them before you’re 67, your benefits will be reduced.
If you plan to retire early, it’s a good idea to use different types of accounts for your retirement savings, like a Roth IRA and a regular taxable investment account. You can take out contributions from a Roth IRA at any time without facing penalties. Money in taxable accounts isn’t tax-advantaged, so you can access it whenever you need. It’s essential to understand the withdrawal rules for each account to avoid unexpected penalties. Consider consulting with a financial advisor to figure out how your withdrawals will be taxed and to create a strategy for using the right accounts at the right times.
Think about working part-time during your retirement.
The survey discovered that 22% of Americans are considering working part-time as part of their retirement strategy. This approach can ease the need to save a significant amount early in your career, especially if you can find a part-time job that covers your daily expenses. This way, you can keep your retirement savings invested, giving it more time to grow.
