If you want to retire early, you’d better start saving early. With the oldest Gen Zers still in their mid-20s, they have a better chance of pulling it off than any generation that came before — but they have no time to waste.
Young adults have the advantage of time, but they’ll need every minute of it to plan and save if they’re going to overcome the obstacles involved with retiring before it’s their turn.
The roadblocks to early retirement have always been both numerous and imposing, but today’s young adults face a unique set of challenges.
First, Gen Zers are expected to outlive current retirees and will need to prepare for retirements that are even longer than today’s, which are already extended by historical standards.
“For accurate retirement planning, you have to consider your life expectancy,” said Melanie Musson, an insurance and financial planning specialist with Clearsurance. “Generally, life expectancy is increasing, so you should plan to live longer than your grandparents or great-grandparents.”
Next, retiring early shortens your time to build a nest egg but extends the time you’ll need it to last.
“If you want to retire before you’re 65, you should plan to have 20 to 25 years’ worth of income saved to live comfortably,” Musson said.
Also, plan for inflation to reduce the purchasing power of the dollars you save over time.
“If you’re living comfortably now, that same figure won’t be enough to retire comfortably for two reasons,” Musson said. “First, you’re young, and you’ll likely live at a higher standard by retirement. Second, a dollar in 40 years won’t be worth what a dollar is worth now.”
Other obstacles include:
- You’ll have to rely solely on your savings until you’re eligible for Social Security.
- With the Social Security trusts scheduled to run out in the 2030s, Congress might reduce benefits, increase the retirement age or both by the time Gen Z retires.
- You’ll have to pay for private health insurance until you become eligible for Medicare at 65.
- You’ll lose out on catch-up years when you’re allowed to make extra contributions to tax-advantaged retirement accounts starting at age 50.
So, How Much Is Enough? Start With a Rough Estimate
Despite all the challenges they face, the most ambitious and disciplined 20-somethings have time to pull it off.
“Gen Z is in the perfect position to get serious about retirement savings and appreciate the benefits of compounding interest,” Musson said. “While knowing exactly how much you’ll need to retire is challenging, you can get a rough idea by tripling or quadrupling your current income to reflect where interest and raises will put your finances in 40 years. Then multiply that annual income needed by the number of years you expect to live retired. Remember, you don’t have to save that full amount out of your paychecks because your investment interest will help you reach your goals.”
The 4% rule, which many retirees use to gauge their savings targets according to their expected timelines, is too generous for anyone aspiring to leave the workforce early.
“While a typical retiree may be able to withdraw approximately 4% to 5% of their nest egg annually without running out of money, younger retirees must withdraw less to make their money last,” said Laura Adams, MBA, an award-winning personal finance author and expert with Finder. “Assuming you’re in your 50s and want an annual gross income of $100,000 from your investments with a 3% withdrawal rate, you’d need over $3 million. For a 3.5% yearly withdrawal, you’d need about $2.8 million saved, and a 3.75% withdrawal rate equates to $2.6 million.”
Kendall Meade, a certified financial planner at SoFi, recommends saving 1.5 dollars out of every 10 you earn — but that’s for those on a traditional timeline.
“15% is the standard, but if you started saving later in life or want to retire earlier, you may want to put away more.”
So, how much more?
“For Gen Z to retire early, considering factors like inflation and longer life expectancy, they should aim to invest at least 20% of their annual income into diverse retirement accounts, starting as early as their first paycheck,” said Celeste Robertson, owner and lead attorney at The Law Offices of Celeste Robertson, LLC, a specialized estate planning law firm.
As Musson pointed out, you don’t have to save every dollar you plan to spend in retirement thanks to interest and returns. Matching the market’s gains is enough to double your money every decade.
“The long-term historical return of the stock market adjusted for inflation is 7%, which does not guarantee future returns but serves as a starting point,” Meade said. “Assuming 7% growth, you could expect your balance to double every 10 years if you were not adding money to it.”
That’s according to the rule of 72, a simple way to estimate how long it will take your money to double — just divide 72 by the annual rate of return (72/7 = 10.29 years). If you reinvest your dividends and earn 10%, you could double your money every 7.2 years — again, that’s assuming no ongoing contributions.
The first step to retiring early is to start saving right away — you’ll never get there with a late start. To illustrate the point, Meade laid out the following balances you’d achieve by age 50, assuming a 15% contribution with a 7% return and a starting salary of $75,000 with a 2% increase per year:
- Starting at 22: $1,014,071
- Starting at 25: $779,384
- Starting at 30: $485,936
The next key is to live small to save big — and never look at windfalls as free spending money.
“One of the biggest hindering factors for retirement goals is lifestyle inflation,” Meade said. “This is when your expenses increase as your income grows. This is a double whammy because not only are they not saving but their expenses are growing so the lifestyle they are accustomed to will cost more in retirement. A way to avoid that is by saving and investing the majority of any raises or bonuses you get.”
Finally, keep as much of your money as possible out of the IRS’ hands by using accounts explicitly designed for retirement savings.
“Leveraging tax-advantaged accounts like Roth IRAs and 401(k)s, combined with the magic of compound interest, can amplify their wealth growth,” Robertson said. “My top tip for young individuals is to automate their savings, continually educate themselves about financial markets, and, if possible, consult with a financial advisor.”
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