Many Americans would retire immediately if they had the money to do so, but therein lies the problem. Even after decades in the workforce, many struggle to amass enough funds for a comfortable retirement.
Understandably, some might think early retirement is out of the question, especially if they only earn an average income. Below, we'll look at what it would take for the average worker to retire early, so you can decide if it's feasible for you.
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What does it mean to retire early on an average income?
First, it's important to define what early retirement even looks like, because everyone likely has their own definition. The typical senior retires at 62, according to a recent survey by financial advisor MassMutual. If we consider this to be the average retirement age, then we could say that retiring before this age would meet the definition of "early retirement."
It's even more difficult to determine how much early retirement costs. A lot depends on the type of lifestyle you hope to have and how long you expect to live. Only you can decide on these two factors.
To determine your retirement savings goal, you need to figure out how much income you expect to need in retirement. You could do this with a retirement calculator or consider the 4% rule.
To use the latter, decide the annual income you want in retirement and multiply this by 25 to determine your savings target. Then, you withdraw 4% of your savings in your first year of retirement, adjusting that amount for inflation in subsequent years. It's supposed to help your money last 30 years, though this might not work for everyone.
For simplicity's sake, let's say that you earn $62,000 per year, about average for a privately employed worker as of March 2024, according to the U.S. Bureau of Labor Statistics. You want to replace 80% of your pre-retirement income in retirement, which comes out to about $49,600 annually. Multiplying this by 25, we get a savings goal of $1.24 million.
The typical 65-year-old today can expect to live until roughly 85, as calculated by the Social Security Administration, and if the 4% rule holds, your $1.24 million in savings could last you from 55 to 85. But retiring this early limits the amount of time you have to build your nest egg.
If you begin saving for retirement at 22, that would give you 33 years to reach your goal. You could do it with $445 in monthly contributions if your investments earn a 10% average annual rate of return. That amounts to about 8.6% of the $62,000 average income. So it seems possible.
But there are a lot of "ifs" here. You can't bank on your investments doing that well every year. You could live longer than the average life expectancy. You might not be able to save consistently every month. Or you might want a higher standard of living than our estimates assume.
All of these variables point to a need for extra savings to be confident that you'll be able to afford an early retirement.
What if you're struggling to save for retirement?
Many Americans struggle to save enough for retirement. A recent survey by financial planning firm Northwestern Mutual found that the typical worker has just $88,400 saved. That would probably only cover a few years of retirement expenses at most.
If you're in this position, especially if you're already in your 50s or beyond, early retirement might not be possible. But that doesn't mean retirement is off the table altogether.
People 50 and older can make extra contributions to their retirement accounts: up to $30,500 in a 401(k) and $8,000 in an IRA in 2024 compared to just $23,000 and $7,000, respectively, for those under 50. Taking advantage of these catch-up contributions, along with claiming any 401(k) match you're eligible for, can grow your retirement savings more quickly, assuming you have the cash to do this.
Too often, the lack of extra cash prevents workers from saving for their future. This is a trickier issue. Anything you can do to reduce your expenses or boost your income is helpful. But you might also consider altering your retirement plans.
If you're worried about running out of money early, you could always delay your retirement for a little while or gradually reduce your hours rather than leave the workforce entirely. This would give the savings you do have more time to grow while also reducing the cost of your retirement.
You'll probably have some Social Security benefits as well. We didn't account for these in our calculations above, primarily because there are a lot of factors that influence how much you'll get from the program. It was intended to replace 40% of pre-retirement earnings for average workers, but this isn't true for everyone.
If you haven't already chosen a retirement savings goal, now is a great time to do so. Once you have your plan in place, you can start building a savings strategy that works for you. And if you don't think you can retire on your original schedule, you can always push it back a little.
