How would you like to retire early? Millennials certainly like the idea, according to a recent survey from Bankrate.com. Millennials identified the perfect retirement age as 61 – a full six years before their full retirement age (FRA) as defined by Social Security and one year before they can even claim reduced Social Security benefits or enroll in Medicare.
If you're planning to retire that early, you'd better have plenty of savings. Fidelity estimates that an average couple that retires at age 65 today will need $280,000 to cover nothing but health care costs. How much will those costs increase when millennials begin retiring (almost a quarter-century from now if they meet the goal of age 61)?
Unfortunately, according to the National Institute on Retirement Security (NIRS), almost two-thirds of millennials have no money saved for retirement at all. Given the effect of compounding, millennials without savings will need to make radical changes soon to retire comfortably at age 61. Either income will have to rise, or spending will have to drop to provide retirement contribution funds.
For perspective, consider NerdWallet's Class of 2018 Money Outlook. NerdWallet assumed a 50/20/30 budget philosophy that devotes 20% of income to savings and debt repayment, typical student loan debt levels, an average salary, and an employer that features a 401(k) with matching contributions up to 6%. By taking full advantage of 6% contributions over a career (receiving an effective 12% of income devoted to retirement), NerdWallet found that 2018 college graduates could retire comfortably – at age 72.
The findings suggest that many millennials are in for a rude awakening unless they start planning for an early retirement now and take action immediately.
The first step is deciding how much money you'll need for retirement. If you're just starting in a career, thoughts of retirement are far away. You're worried about maintaining your current job and mapping out a plan of advancement. However, you still need a target value that you can adjust as your retirement strategy clarifies over time.
What's your guess on needs to fund a thirty-year retirement – a real possibility if you're planning to retire at age 61? According to an Aperion Care survey reported in early 2018, one-third of millennials believe they can retire on $200,000 or less. One-quarter of millennials expect to need $1 million or more. How does your guess fit in?
Start with the assumption from AARP that a retiree needs $1.18 million at the time of retirement to live off $40,000 per year over a thirty-year retirement. Experts suggest that you determine a percentage of your final pre-retirement salary as a goal – typically around 80%, but that assumes a relatively sedate retirement lifestyle. If you like to travel and follow new pursuits, you may need closer to 100%.
Are you serious about retiring early? You'd better be serious about saving as well.
With the AARP assumption as a starting point, find a retirement target that meets your expected needs for your dream retirement. With a target in hand, adjust your 401(k) or IRA contributions immediately (with a bit of cushion if possible). Set up a realistic budget that allows you to devote your target percentage to retirement funds. Control spending and keep other debts down, and then retiring at age 61 is still an attainable goal.
If you don't like the lifestyle that budget imposes on you, maybe working longer is worth it to make your working years more enjoyable. The decision is yours.
Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.