With the advent of the Financial Independence, Retire Early (FIRE) movement, more and more clients are asking us to help them plan for an ‘early’ retirement. But what does ‘early’ really mean? According to a recent Forbes article, the average retirement age for Americans is 631. However, when I speak to someone who specifically uses the word ‘early’, they are most likely talking about retirement before age 60, and maybe significantly earlier. This movement is especially popular amongst millennials and younger workers, but is it really possible?
The answer is yes, it is absolutely possible to retire in your 50’s, or perhaps even earlier. I have seen clients accomplish retirement in their 40’s, but only after a significant windfall, such as the sale of a business or a large inheritance. Saving for retirement in one’s 40’s without a windfall would require an extremely rigorous savings plan. Some folks in the FIRE movement claim to be saving 50-75% of their income2, which is not realistic for most people I meet. Think about it- if you retire at age 45, maybe you have worked a total of 23 years, give or take. If you live to age 90, you will be retired for almost twice as long as you actually worked! This is a massive undertaking.
If you are interested in pursuing an early retirement goal, it is critical to set a specific and measurable goal. I like to ask clients what their ideal retirement age is, as well as their ‘no later than’ age. Maybe a client would love to retire by age 55, but would find any age up to and including age 60 acceptable. If they must work beyond 60, they would be upset or disappointed. Next, I assess the client’s progress and determine when they can retire if they continue their current saving strategy. If they need to increase or improve their saving strategy but can’t get on track for retirement at age 55 yet, we can start chipping away at the goal by getting them on track for age 59 for example. Then, at the next raise, expense reduction, or other opportunity, we have a plan for how to repurpose that capital so that it will help reduce their retirement age until they are on track for their ideal age. Small bites are easier to swallow!
For anyone hoping to retire early, it is imperative to begin saving as early as possible. The earlier one starts, the more one will benefit from compound interest. It is also very important to work with a professional who can educate you on which kinds of accounts will best meet your needs. For example, if a client wants to retire at age 50 and is able to save sufficiently to do so, we can’t just fund retirement accounts! Most retirement accounts like IRA’s and 401k’s are subject to the IRS’s age 59.5 requirement3. If the client is not yet 59.5, he/she cannot withdrawal from their retirement accounts without paying taxes and a 10% penalty. We therefore must build other assets that will be liquid and available during the client’s 50’s to make this goal possible.
Also, we can’t forget that there are other risks to retiring early, including, but not limited to:
- Private health insurance can be expensive, and Medicare eligibility doesn’t begin until age 65. That could be 5, 10, 15 or more years of funding private health insurance!
- In recent years, we have all seen the pain that inflation can cause when it runs hot, and it is entirely possible this will happen again during your retirement years.
- Even if you have a fantastic plan, it is still possible to run out of money too early. Medical or long-term care costs are hard to predict but can be substantial. There are numerous unforeseen circumstances that can arise, and that is why it is wise to continue to work with a professional through your retirement years because we can help you spot trouble, and pivot before it’s too late.
- You have less time to benefit from compound interest.
- It may be difficult to reenter the workforce after retiring if you need or want to.
Finally, I have seen firsthand that it can be difficult to find purpose after one has retired, especially for those that were used to working long hours at a job they were passionate about. One must learn to fill the time with other interests, passions, and companionships. Many of us take for granted the social aspects of our working lives. Those of us who see and talk to a lot of people during the course of our business day may be left feeling empty when that ends. It is important not to just plan for the financial aspects of an early retirement, but one should also have a plan to ensure one’s academic, spiritual, physical and social needs are met during retirement as well.
Still want to pursue an aggressive retirement goal? Give us a call, and let’s chart a path forward together.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
1 Tretina, Kat. “The Average Age of Retirement In The U.S.” Forbes, 6, Jan. 2024, What Is The Average Retirement Age? – Forbes Advisor
2 LPL Financial. “Setting FIRE to Retirement Planning: The Financial Independence, Retire Early (FIRE) movement is gaining steam.” LPL Educational Articles for Gainfully. Oct. 2023, pp. 1-2.
3 “401(k) resource guide- Plan participants- General distribution rules.” Official IRS Website, 20, Aug. 2024, 401k Resource Guide Plan Participants General Distribution Rules | Internal Revenue Service