The Transamerica Center for Retirement Studies recently conducted a survey of more than 4,500 Americans ages 50 and older. About half of those surveyed are retired and not working, and the other half are still working or looking for work. The study found that the average age at which retirees left the workforce was 62 years, and that 58% retired before the age of 65 years. In contrast, the average age at which those still working are expected to retire is 67. Nearly one in five (19%) do not plan to retire at all.
However, sometimes life gets in the way. More than half of retirees (56%) retired earlier than they planned. Of these, 17% did so because they were financially able. Only 7% retired later than they planned.
If you want to join the ranks of those who retired sooner than planned because they were financially able to do so, here are some steps you can take.
Save more
There are two ways to improve your financial picture: save more and spend less. When planning for retirement, especially if you’re starting early, saving more can have a big impact on your ability to do so.
Your first step should be to maximize your tax-deferred retirement contributions. Put as much as you can into a 401k or IRA. If you’re young and don’t need a tax deduction for your contributions, choose the Roth option if it’s available. You’ll contribute your money after taxes, but when you retire, all of your withdrawals will be tax-free.
If you’re just starting out and having trouble making the maximum contribution, here’s a tip: Contribute as much as you can, and each time you get a raise, increase your contributions by at least half the amount of the raise. For example, if you contribute 10% of your salary to a 401k and get a 6% raise, increase your contribution to 13%. Do it right away, preferably at the same time the raise takes effect, so you won’t even notice the difference in your paycheck.
Once you contribute the maximum amount to your 401K ($23,000 in 2024, or $30,500 if you’re 50 or older) or your IRA ($7,000 in 2024, or $8,000 if you’re 50 or more), remember that saving does not happen you should stop there. You can save and invest as much as you want in a non-retirement account (sometimes referred to as a non-qualified account). You’ll have to pay taxes on the money before you get rid of it, but when you spend it, you’ll only be taxed on the earnings.
Spend less
Although you certainly don’t want to restrict your spending so much that you don’t enjoy your working years, there are likely places where you can cut back on your spending without a significant decrease in your quality of life. When you cut back, make sure the money you save goes into your retirement fund. Look at all the unnecessary purchases you make to see what you can get rid of. You may have subscriptions that you pay for every month and don’t even use them. Get rid of these things and invest that money in savings.
Look at your other monthly bills to see if there are savings opportunities. Drive your car for a few years after paying off the loan and put that monthly payment into savings instead. If you’re still paying for cable TV, see if a streaming service and antenna will work instead.
Pay off your debts
Paying off debt, especially high-interest credit card debt, is a win-win. When you pay off your debt in full, you not only eliminate that monthly payment, but you also eliminate the interest you were paying to service that debt. This should be your first priority when it comes to improving your financial situation so that you can retire early.
Downsize your home
For many retirees and retirees, their home is their largest investment. It can also be a source of capital in your retirement years. Consider selling the family home and moving to a smaller home, perhaps in a less expensive area. This is especially useful for empty nesters, as they no longer need space for children, and “good schools” are no longer an excuse for living in an expensive city.
Start living within your retirement means now
This is an exercise that will not only help you save for a comfortable retirement, but it will also help you determine whether your assumptions about your cost of living in retirement are accurate. First, determine what expenses you are likely to have in retirement. Include only the necessities – You can set an allowance for travel or other activities when the time comes, but for now, determine how much you will need to live on when you retire.
Add back the things you need to pay for now that you won’t need once you stop working, such as commuting costs, your work wardrobe, etc. It’s tempting to put health care costs on this list, but even though you’ll be eligible for Medicare at age 65, you may face additional costs for things that Medicare doesn’t cover. Fidelity estimated that the average couple would need $315,000 to cover medical costs in retirement, and that doesn’t include long-term care.
Once you have the calculations done, try to live on that amount (retirement costs plus any costs that are necessary while you work but will go away once you retire) and see how it goes. If it’s difficult, you may need to adjust your expectations of what you’ll need in retirement and adjust your savings plan accordingly. If possible, you’re probably in good shape to retire early, but continue to monitor your plan over time.
More from GOBankingRates