Early Retirement: Early Saving Pays Off

Building wealth to retire early starts with beginning your retirement planning and saving for retirement early in your career.
By Richard Barrington

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Who doesn't dream of early retirement after a long, tough week of work?

Some Americans have made that dream a reality.

Whether it's the physical demands of a job or pressure from the boss and irritating co-workers, the drawbacks of working get to you more and more as the years go by.

Even if you love your job, having the financial means to retire early is a form of freedom. It allows you to retire on your terms when the time is right. Financial freedom can also help protect you against the kind of setbacks that could affect your company or industry and ultimately cost you your job.

Retirement planning survey conducted

MoneyRates.com surveyed 1,000 people aged 45 and over to discover the state of retirement planning in 2020. Half of those surveyed had not yet reached the traditional retirement age of 65, and half of them had.

One clear outcome of the survey substantiated the premise that starting to save early in your career has an impact on your ability to retire early. But the goals of the study were larger in scope.

The study was designed to see where people's retirement plans stood, both as they approached retirement age and after reaching it. With that data, we could…

  • ...learn how many people are able to retire early
  • ...explore the relationship between early savings and early retirement
  • ...develop tips to help people save early and build wealth though investments in retirement accounts

Who Has Reached Early Retirement?

The survey found that just over 1 in 5 (21.6%) of those surveyed who are younger than age 65 have already retired.

Another 8% of those younger than 65 are semi-retired.

In total then, 29.6% of those aged from 45 to 64 have already been able to quit working completely or cut down to working part time.

While not a majority, it does show that a significant number of Americans have been able to retire or semi-retire early.

Some have been able to make the dream of early retirement happen even sooner. The survey found that 10.4% of those aged from 45 to 54 are already retired. Another 7.2% in this age group are semi-retired.

How Many Americans are Working Past Retirement Age?

On the other side of the ledger, some Americans are continuing to work past age 65. Instead of retiring early or even on time, these folks will be retiring late.

The survey found that 16.2% of respondents are still working full or part time after reaching the age of 65.

Of course, for some, working past retirement age is a choice. In many cases, though, it's a matter of financial necessity.

One goal of retirement planning should be to make how long you work a matter of choice. That means having enough saved to support a comfortable retirement by the time you reach age 65, whether you choose to start using the money then or not.

How Early Retirement Savings Relates to Early Retirement

What separates those who have been able to retire early from those who are still working past retirement age?

A key factor seems to be when people started saving for retirement. It makes sense that early savings would improve your chances of early retirement, and the survey backs this up.

Roughly two-thirds (66.9%) of those who have been able to retire or semi-retire before age 65 started saving for retirement by age 40. This includes 35.1% of people who were able to retire or semi-retire early because they started to save by age 30.

In contrast, those who are still working at age 65 and beyond are less likely to have gotten an early start on retirement saving.

The survey found that only 18.2% of those still working past retirement age started saving by age 30. This is less than half the number of early retirees who started saving that early.

In fact, nearly a quarter (23.4%) of those still working at age 65 or beyond have not yet started saving for retirement. This is an example of how waiting too long to start saving can cut down on your options later in your career.

Why Saving Early Makes Early Retirement Possible

As the survey shows, people who retire early are much more likely to have started saving early than those who are still working past retirement age. Two concepts help explain why this is:

1. Saving early spreads the burden

Imagine you're loading 500 pounds of boxes into a moving van. Do you make an insane attempt to carry them all at once, or do you make the job manageable by making several trips?

Retirement saving is also a big job that becomes easier if you spread out the load.

Suppose you hope to put a total of $250,000 into a retirement account by the time you reach age 65. When you start saving makes a big difference in how hard that goal will be to reach:

  • If you start at age 25, you can spread that savings goal over 40 years. This will come to an average of $6,250 a year.
  • If you wait 10 years to start at age 35, you'll only have 30 years to save money. Reaching that $250,000 goal will now require an average savings of $8,333 per year. Still manageable perhaps, but not as easy.
  • If you wait 20 years and don't start until age 45, you only have 20 years left. This would mean saving $12,500 per year - something that may well be beyond your budget.
  • If you don't start saving until you are 55, you now have just 10 years to meet your goal. This would mean setting aside $25,000 per year - an unrealistic goal on most people's incomes.

Unfortunately, many people don't get serious about retirement planning until they get closer to retirement age. The job is much easier if you start earlier.

2. Saving early uses the power of compounding investment returns

One thing that can make retirement saving easier is growing your money through investment returns. Saving early gives you the opportunity to have more years of investment returns that do the work for you.

The impact of these returns is magnified by compounding. The return you earn on your money one year can then be invested and earn an additional return in each subsequent year.

Over time, compounding can have a dramatic effect on retirement savings. Here's how $1 earning an investment return of 6% per year can grow by the time you reach age 65. The difference in the two examples shown is whether you invest that $1 at age 25 or at age 60:

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In short, starting to save for retirement early spreads the task over a greater number of years and gives you more time for compounding investment returns to work on your behalf.

How to Make Early Retirement Happen: 10 Tips for Building Wealth Early

It's fairly easy to understand how starting to save earlier can help you retire earlier. The tricky part is making it happen.

  1. Automate your savings plan

    Use automatic savings, like payroll deductions into a 401(k) plan, to make retirement saving seamless and relatively painless. It's easier to save when the money doesn't first pass through your bank account.

  2. Direct deposit to a savings account

    If you have your pay directly deposited into a bank account, have it go into a savings account rather than a checking account. Then move only a budgeted amount into checking so you are less tempted to spend more than you planned.

  3. Plan how much to save

    Use a retirement calculator to set a savings goal. Even if you can't start saving yet, it helps you plan ahead to know how much to save for retirement in the long run.

  4. Plan your budget around your saving goal

    Make saving for retirement the first priority in your budget rather than something you do with whatever money is left over.

  5. Bank your pay raises

    If your budget is too tight to save much initially, wait till your next raise and immediately start putting a healthy portion of that raise toward savings. You're less likely to miss money you aren't used to having.

  6. Take advantage of employee benefits

    Try to contribute enough to take full advantage of employer matches, if available, in your company's 401(k) plan and HSA program.

  7. Evaluate job offers in terms of retirement saving benefits

    Consider retirement benefits like matching contributions along with salary when comparing job offers.

  8. Use HSA accounts to accumulate savings for medical expenses in retirement

    Note that, if you max out your 401(k) contribution limit, you can use an HSA for more than just near-term medical expenses. You can accumulate savings in an HSA for health care expenses in retirement.

  9. Explore IRAs if you can't contribute to a 401(k)

    If your company doesn't have a 401(k), open an IRA at a bank or brokerage firm. Consider an online bank or online broker for the best account terms.

  10. Make age-appropriate investments

    Generally speaking, the younger you are, the more aggressive you can afford to be. You can manage this yourself, opt for a target-date fund or use a robo-advisor to automate an asset allocation approach that fits your situation.


Take the next step

Whether you started early or not, planning for retirement is a big task - and you can't afford to waste time or money along the way. That's why it's important to take control of your finances and learn how to build wealth. You can do it yourself or work with a financial advisor to help you develop your strategy.

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