Nearly half of non-retired Americans predict that they won't retire until at least age 66, according to a 2018 Gallup poll. But what if you could be one of the few who retire far earlier than that?
Imagine being able to spend your 50s traveling, pursuing your hobbies, and spending more time with your children -- not being stuck in the office or reporting to a boss, Sounds picturesque, right? The good news is that it is possible to retire that early, but the bad news is that it's not going to be easy -- and it will likely require a lot of sacrifices.
There are two main challenges you'll face when planning to retire early. First, you have less time to save income before you leave your job, so you'll need to supercharge your savings to build a strong nest egg before you retire. Second, because you'll be spending more years in retirement than the average retiree, you'll need to have even more money stashed away.
For these reasons, retiring super early simply isn't feasible for many people. Those who do retire early can find themselves forced back into the workforce when their savings run dry. One third of Americans have less than $5,000 saved for retirement, according to a recent survey by Northwestern Mutual, so being able to save enough to retire by 50 is a lofty (and perhaps unattainable) goal for most people.
That being said, if you have your heart set on retiring as early as possible, here's what it would take.
1. Determine your retirement number, or savings goal.
Before you can even think about retiring, you'll need to know how much to have saved -- your retirement number.
There's no easy way to get an accurate idea of how much you'll need during retirement, but there are a few ways to get a ballpark estimate. For example, some financial experts recommend multiplying your current income by 25 to get a rough goal in mind. While that's a good place to start, it's a vague (and potentially inaccurate) estimate, so take that number with a grain of salt. You can also use a retirement calculator, again keeping in mind that it won't be 100% accurate. (Test several different calculators to get a range of answers because they're based on different factors and inputs.)
Also consider any other sources of income you may have during retirement. While you're not eligible to start claiming Social Security benefits until age 62, they can help cushion your nest egg later on. (To get an idea of how much you may receive in benefits, check out the Social Security online calculator.) If you have a pension plan through your employer, don't forget about that income.
So, say you're currently earning $60,000, and you expect to continue spending that much each year throughout retirement. Let's also say you'll be receiving $15,000 per year in Social Security benefits if you start claiming them at age 62. That means you'll only need to pull $45,000 per year from your own savings. However, from age 50 to 62, you won't have those benefits to lean on -- so all your income will need to come from your personal savings.
To play it safe, it's a good idea to leave Social Security out of the equation (at least for now). It's always better to overestimate how much you'll need to have saved, rather than underestimate and risk running out of money. If you retire as early as 50, your savings will need to last several decades -- so it's wise to save more than you think you need in case you do live into your 90s or beyond.
So in this example, multiplying $60,000 by 25, you should aim for around $1.5 million in savings by the time you retire. Keep in mind that this is just a rough estimate, and you might actually need more or less than this during retirement. But for simplicity's sake, it's a good number to start with.
2. Determine how much you need to save to reach it.
A nest egg of $1.5 million won't be easy to achieve, but it's a little more manageable when you break it down bit by bit, to see how much you'll need to save each month or each year to reach that goal.
Exactly how much you'll need to save will depend on several factors, most notably the amount of time you have left to save. The earlier you start saving, the easier it will be to save more -- because your money has more time to grow. If you wait until, say, age 40 to start saving, it will be nearly impossible to save $1.5 million in 10 years. But if you start in your 20s, it will be considerably easier.
Imagine you're a 25-year-old with nothing saved yet for retirement. Assuming you're earning a 7% annual rate of return on your investments, you'll need to save around $2,000 per month for 25 years to end up with $1.5 million by age 50. Wait until age 30 to start saving, and you'll need to sock away around $3,000 per month to reach that goal.
At this point, it's time for a reality check to decide whether early retirement would really be feasible for you -- and more importantly, whether it's actually worth it. While early retirement sounds dreamy on paper, is it worth the extra sacrifices you'd have to make in the decades leading up to retirement? Or would it be more enjoyable to delay retirement by a decade or two, but then be able to spend more money on the things you love in the years before you retire? There's no right or wrong answer, as it's a highly personal decision. But it's something to think about as you're deciding whether early retirement is right for you.
No matter when you choose to retire, saving for the future is never easy. And while many people dream of being able to retire early, it's a goal few are able to actually achieve. But it's not impossible. If you're up for the challenge, you may be able to ditch your job and be the envy of everyone wishing they could do the same.