According to data collected via the Federal Reserve’s 2017 Survey of Household Economics and Decisionmaking, the average retirement age among retirees in the United States is 59.88 years old. Meanwhile, 63.1 percent of all retirees left work between the ages of 57 and 66. At 62 years old, individuals are eligible to collect Social Security.
While one’s financial situation and other circumstances play a large role in determining when to retire, the prospect of early retirement doesn’t have to be a pipe dream. If you are planning to retire early, consider the following suggestions.
1. Start Saving Early
It’s never too early to think about retirement. Generally speaking, you should save enough so that you have at least 80 percent of your annual income available to spend each year of retirement. For instance, if you made $50,000 per year and expect your retirement fund to last 25 years, you’ll need to save $1 million. This sounds challenging, but it’s much easier if you begin saving as soon as possible.
For example, considering a reasonable 7 percent annual return on investment rate, if you put aside $5,000 per year beginning at age 25 you can have nearly $1.18 million by the time you turn 65. Using those same metrics, if you start saving at 35 you will have just $551,000 at 65. To reach that $1 million goal, a 35 year old would need to put aside $10,000 per year to retire at age 65.
Another reason to start saving early is that in your early 20s you might not have too many expenses or much debt, other than student loans. Even if you put aside a couple hundred dollars per month, you will build up compound interest and get a head start on the retirement planning process. The older you get, the more expenses you might have, so allotting funds for a retirement savings plan can be difficult.
2. Invest in Stocks
Saving through an employer-sponsored 401(k) plan or an individual retirement account (IRA) is a great way to take advantage of up-front tax savings and tax-free withdrawals, but investing in stocks can help your retirement fund grow at an expedited rate. While there is some risk, with the help of a qualified wealth management professional you can feel more confident knowing that your money will be invested effectively and to your desired level of risk.
Over the past 90 years, the S&P 500 has registered annualized returns at 9.8 percent. Purchasing an ETF that tracks the S&P 500 can be an effective way to mitigate risk and take advantage of the market’s natural growth.
3. Determine Spending Needs
The 80 percent rule is merely a guideline and will differ for individuals based on their retirement spending needs. For instance, if you haven’t (or don’t expect to have) paid off your mortgage by the time you retire, you might need additional funds to cover that expense. If it is paid off, you could potentially live comfortably in retirement with significantly less savings. However, there are other things you need to consider, such as whether you intend to travel regularly or if you will set aside money for your children’s education.
“Retirement-planning accuracy can be improved by specifying and estimating early retirement activities, accounting for unexpected expenses in middle retirement, and forecasting what-if late-retirement medical costs,” notes Whitehouse Wealth Management president and CEO Alex Whitehouse.
4. Delay Social Security Payments
Social Security benefits are a great complement to IRA savings or money generated through other investment accounts. While Social Security likely isn’t enough on its own to support your retirement goals, payments have the benefit of being protected against inflation and aren’t subject to change based on the performance of the stock market. These benefits can be collected at 62, but to maximize payments, it’s best to wait until you turn 70, if possible.
If you are working until age 70 or if waiting that long to collect payments isn’t feasible, another option is a Social Security bridge payment, which, in essence, acts as a retirement transition fund. This can be done by withdrawing the Social Security benefit amount from an IRA or 401(k) and transitioning it to another account.
5. Plan for Inflation
Saving at an early age has its obvious benefits, but those who do so need to plan appropriately for inflation, which is more or less an invisible tax on assets that can do exponential damage to your wealth over time. At a 4.5 percent inflation rate, the purchasing power of your retirement savings will be cut in half every 16 years. That’s a reasonable estimate considering $100 in 1960 had the same purchasing power as $500 in 1995, accounting for a 4.8 percent annual compound inflation rate. If you intend to retire early, consider structuring your portfolio to offset inflation by investing in fixed income sources, equities, and rental real estate that produce recurring payments.