Everyone had money during the ’90s. At least, that’s the story that most pundits will put forth. Of course, there are others who will argue that the good old days occurred much earlier than the Clinton administration.
It was in the 1950s and the 1960s that most people worked for a large company for their entire careers. Those big companies loved their employees so much that they offered pensions that would kick in around age 60 or 65, and the formerly employed would be able to ride on easy street until time took its toll and they passed from the scene at around age 70 or 75.
Today, many people argue that it’s going to be nearly impossible for any generation after the Baby Boomers to retire early, if they’re even able to retire at all. It is true that pensions are quickly going the way of the saber-toothed tiger, but there are other options that people can utilize to take their own money into their own hands. Here are some things to think about when talking about the possibility of retiring early.
Social Security Will Not Be Available
Some people argue for the imminent demise of the Social Security system. These arguments are premature because even dire projections still see the system paying out 70 percent of the current level a few decades from now and leveling off at that point. Could there be a cut in payments? Yes. Is the system likely to go completely belly-up? No.
The biggest problem when it comes to early retirement and Social Security lies in the fact that people can’t access these funds until they are at least 62. At this early date, benefits are much smaller than if people waited to take payments at their full retirement age of 66 – 67. Therefore, it’s no use to count on Social Security for early retirement.
There Are a Number of Opportunities for Retirement Income
In the private sector, many companies offer employees 401k plans. These retirement vehicles allow employees to save up to $18,000 per year (as of 2015) in a retirement plan that defers income taxes until the money is taken out. If a person were to max this out for the first 20 years of employment, they’d have accrued just above $871,000 should they average an 8 percent return over that time. At the assumed safe withdrawal rate of 4 percent, they’d be able to take out about $35,000 per year without running out of money.
Lest people be concerned if their employer is not in the private sector, there are other options for early retirement. Governmental agencies still tend to provide traditional pensions. They also frequently allow employees to save in a 457 deferred compensation plan. This works much like the 401k, but when an employee decides to retire, they can take the money out without penalty.
Nonprofits will–quite often–offer a 403b plan. Even those who do not have an employer who offers retirement plans can still save up to $5,500 per year in a traditional IRA or Roth IRA. The latter could help provide income in early retirement because the contributions are not taxable and can be taken out at any time.
Working Income Is Important
It will be difficult for any worker at a fast food joint or a retail establishment to get to early retirement if they stay around minimum wage. It is possible to save up, but it will take many years to save a large enough amount to actually retire. A higher income allows people to come closer to maxing out their 401k and IRA accounts each, and this is key toward getting to early retirement.
Saving Is More Important
Dave Ramsey recommends saving 15 percent of income in a retirement account. He estimates a 12 percent return. While this is not a realistic return under most circumstances, he is right that a person will have a sizable nest egg after 40 years, but this is not early retirement.
There are newer financial preachers who argue that a middle-class income should allow a person to save between 40 and 80 percent of their annual income. Jacob at Early Retirement Extreme argues that a person can live on $7,000 per year. Pete at Mr. Money Mustache shows that even a teacher making $40,000 per year can retire in about 10 to 13 years if they cut down on their frivolous spending and save enough.
Living on less allows for the required nest egg to be much smaller if a person saves enough to maintain the 4 percent safe withdrawal rate because the cost of living will be lower indefinitely without new cars and a McMansion. Finding additional options for income on the side can speed up the process, and paying off all debt is a must for early retirement.
While many people are concerned that they’ll never be able to retire, it is definitely possible. All that’s needed is avoiding major medical problems and saving a large percentage of your income from each and every check. A 40-year working career could drop to 20 years or less with some hard work and adequate planning.