The Transamerica Center for Retirement Studies recently conducted a survey of over 4,500 Americans aged 50 and older. Approximately half of those surveyed were retired and do not work, and the other half of were still working or looking for work. The survey found that the median age at which the retirees left the workforce was 62, and 58% retired before 65. By contrast, the median age at which those who are still working expect to retire is 67. Nearly one in five (19%) do not plan to retire at all.
That said, life sometimes gets in the way. Over half of retirees (56%) retired sooner than they had planned on doing. Of those, 17% did so because they were financially able. Just 7% retired later than they planned.
If you want to join the ranks of those who retired sooner than planned because they were financially able to do so here are some steps you can take.
Save More
There are two ways to improve your financial picture: Save more and spend less. When planning for retirement, especially if you’re starting early, saving more can have an outsized impact on your ability to do so.
Your first step should be to max out your tax-deferred retirement contributions. Put as much as you can into a 401k or IRA. If you’re young and you don’t need the tax deduction for your contributions, choose the Roth option if it’s available. You’ll contribute after tax money, but when you retire, all of your withdrawals will be tax free.
If you are just starting out and are having trouble making the maximum contribution, here’s a tip: Contribute as much as you can, and each time you get a raise, increase your contributions by at least half of the amount of your raise. For example, if you are contributing 10% of your salary to your 401k and you get a 6% raise, increase your contribution to 13%. Do it immediately, preferably at the same time your raise goes into effect, so you won’t even notice the difference in your paycheck.
Once you’ve contributed the maximum amount to your 401k ($23,000 in 2024, $30,500 if you’re 50 or older) or your IRA ($7,000 in 2024, or $8,000 if you’re 50 or older), remember that saving doesn’t have to stop there. You can save and invest as much as you want in a non-retirement account (sometimes referred to as non-qualified). You’ll have to pay taxes on the money before you sock it away, but when you spend it, you’ll only be taxed on the earnings.
Spend Less
While you certainly don’t want to restrict your spending so drastically that you’re not enjoying your working years, there are probably places where you can cut back without a significant decrease in your quality of life. When you do cut back, make sure the money you save goes toward your retirement fund. Look at all the non-essential purchases you make to see which you can eliminate. You may have subscriptions that you’re paying for every month that you don’t even use. Get rid of these and put that money toward savings.
Look at your other monthly bills to see if there are savings opportunities. Drive your car for a few years after the loan is paid off and put that monthly payment into savings instead. If you’re still paying for cable TV, look at whether a streaming service and an antenna would work instead.
Pay Off Your Debt
Paying off debt, especially high-interest credit card debt, is a win-win. When you pay off your debt in full, not only do you eliminate that monthly payment, but you also eliminate the interest you were paying to service that debt. This should be your first priority when it comes to improving your financial situation so you can retire early.
Downsize Your Home
For many pre-retirees and retirees, their home is their biggest investment. It can also be a source of capital in your retirement years. Consider selling the family homestead and moving to a smaller home, perhaps in a less expensive area. This is especially helpful for empty nesters, since they no longer need room for the kids, and ‘good schools’ is no longer a justification for living in a pricey town.
Start Living Within Your Retirement Means Now
This is an exercise that will not only help you save for a comfortable retirement, but it will also help you to determine if your assumptions about your cost of living in retirement are accurate. First, determine what your expenses are likely to be in retirement. Include necessities only — you can set an allowance for travel or other activities when the time comes, but for now, determine how much you will need to live when you’re retired.
Add back in the things that you need to pay for now that you will not need once you’ve stopped working, like commuting costs, your work wardrobe, and so on. It’s tempting to put healthcare costs on this list, but even though you’ll be eligible for Medicare at age 65, you could face additional costs for things that Medicare doesn’t cover. Fidelity estimated that the average couple will need $315,000 for medical costs in retirement, and that doesn’t include long term care.
Once you’ve done the calculations, try to live on this amount (your retirement costs plus any costs that are necessary while you’re working but will disappear once you retire) and see how it goes. If it’s a struggle, you may need to adjust your expectation for what you will need in retirement and adjust your savings plan accordingly. If it’s doable, you are probably in good shape to retire early, but continue to monitor your plan as time goes by.
