The very idea of being able to retire at age 55 is a dream for most people. Unfortunately, it's a dream that is swiftly turning into a nightmare for an overwhelming majority of individuals. The cost of living continues to go up, often exponentially. This makes everything from gasoline to groceries more expensive. The problem is that in a lot of cases, paychecks have not been keeping up with the ever-increasing cost of practically everything else.
As a result, even those individuals who were able to live relatively comfortably as recently as 12 to 18 months ago are now beginning to feel the pressure of trying to maintain that same lifestyle without an increase in pay. That makes it even more difficult to save for retirement, largely because most of the money that a person makes could potentially be needed for day-to-day living.
The Struggle of Saving for an Early Retirement
Unfortunately, saving for retirement has always been something of a struggle for the majority of Americans. In April 2021, it was estimated that 52% of the American population were unable to save anything whatsoever for retirement, as they were basically living from one paycheck to the next. Fast forward just two months and that number had increased by an additional 3%. One year later, in June 2022, that percentage had skyrocketed to 61%. Things have only gotten worse since then.
Unfortunately, that means that less than half of the American people have been able to save any significant amount of money for retirement for a number of years. With the most recent cost increases associated with practically everything, it seems almost impossible to avoid yet another increase in the percentage of American citizens who live from one paycheck to the next, with little or no hope of saving for retirement.
Can You Save Enough to Retire at Age 55?
If you're fortunate enough to have a good paying job that offers solid employment and you're really good at managing money, then yes, there is an outside chance that you could save enough money to retire by the time you're 55 years of age. That sounds like a dream come true. However, it's imperative that you be prepared for what you might have to go through in order to achieve that goal.
It's definitely not an easy task, so it's typically not something for the faint of heart. In fact, financial experts agree that you need to base the amount of money that you would save by the age of 55 on the amount of income that you are currently making and then multiply it by seven. In other words, you need to take whatever you're making on an annual basis and then save seven times that much if you hope to have any chance of even thinking about retiring at age 55. If you're making $55,000 a year, that means you need to have at least $385,000 saved by the time you reach age 55. Anything less would likely mean that you would have to make significant lifestyle changes because you would be living on a fixed budget that's restrictive.
The truth is, anything less may prevent you from doing the things you've been accustomed to doing throughout your lifetime. Of course, it seems a lot more feasible to save $385,000 if you're 21 years of age than it does if you're already in your 40s. In addition, there are other things that have to be considered as well. As you'll soon see, the amount of money that you need to have saved in order to retire at age 55 isn't nearly as much about finding some blanket number as it is about taking an almost endless number of things into consideration on a more personal level.
What Should You Consider Before Retiring Early?
As previously mentioned, there are a number of factors that you need to consider before making the decision to retire early. For starters, you have to take your current lifestyle into account. Are you happy with your life as it currently is? Do you currently have enough money to cover all of your basic expenses such as housing, utilities and food, all while still having enough money left over to enjoy life a little bit?
There is a growing camp of financial experts who feel that anything less than $1 million is too little for retirement, especially if you plan to retire early. If you plan on traveling during your retirement, then you also have to ask yourself whether or not you want to travel more or less than you're currently traveling. A dramatic increase in travel during retirement would mean more incurred expenses, something that must be planned for.
You also have to plan for things like health care. Are you currently healthy or do you have health problems that you already know you will have to deal with in retirement? What about other health problems that may or may not become a factor as you age? Last but certainly not least, are you planning to live off an entirely fixed income or do you want to incorporate some sort of passive income into the arena so that you can count on having money coming in every month, even in retirement? It's also important that you realistically consider how long you think you might live. It's much better to plan on living until age 95 and then fail to reach that age than it is to plan on living until age 70 and then live another twenty-five years without any money to speak of whatsoever.
Learning to Live Lean
Anyone who wants to retire at age 55 probably already knows that one of the easiest, most effective ways to do that is to refrain from excessive spending during their younger years. As a matter of fact, many individuals agree that in order to retire at this relatively young age, you would first need to secure a job that pays somewhere in the neighborhood of $80,000 a year and then decide to live on about half of that income for at least 20 years, saving the other half for your retirement. The very idea of being forced to live on just $40,000 a year can leave a bad taste in your mouth, especially when you consider how expensive things are these days. In order to gain a better understanding of the complexities involved here, let’s break a few things down.
Breaking It All Down
It's not at all outside the realm of possibility to live in an extremely modest house that still costs you at least $300,000 to own. Only a few years ago, you could build a very nice house for less than $200,000. Many individuals are asking themselves whether or not it's even possible to live on $40,000 a year with the economy in its current state. Virtually anyone who has made even the most basic of trips to the grocery store recently would probably concur with such a question, as the overall cost of living has practically tripled within the last couple of years.
That being said, there is one definite benefit to forcing yourself to live on the bare necessities in order to save money for your retirement. Once you become accustomed to living that way, you have a tendency to stop wanting to spend money on things that aren't necessarily required. Sure, you can splurge every once in a while. Go out for a nice meal in order to celebrate a special occasion or allow yourself the experience of buying a high quality article of clothing, a popular fragrance or a nice piece of jewelry once or twice a year.
The thing is, you can't do that on a monthly basis, certainly not if you plan on living on $40,000 a year. In short, learning to live this way helps you prepare for living that way in retirement. The idea is that by the time you save enough for retirement, you might be able to live an even more comfortable lifestyle than you're accustomed to. That’s because you should have enough savings that you can spend more. Again, it all hinges on the state of the economy and how much inflation has increased by the time you finally retire.
Should You Plan for the Unexpected?
Telling you that you need to plan for the unexpected is frustrating, to say the least. How exactly are you supposed to plan for something when you really have no idea what you're planning for in the first place? The thing is, no one knows what their future is going to be like. If you really want to get down to it, you have no idea what the next five minutes might bring you, much less how your life is going to be 20, 30 or even 40 years down the road. It's important to plan for the unexpected because the only thing that you can really count on here is that things will change.
You just don't know what those things are going to be yet. When you're talking about retirement, things you typically have to think about include an ever-increasing cost of living, costs for healthcare that you might not have counted on and how you will handle saving for retirement through job changes and the like. Each one of these things is important enough that they need to be approached one at a time. Failing to plan adequately for any of these three main issues could potentially derail your retirement plans before they even get started.
How Do You Combat the Cost of Living?
If you're like most people, you're probably wondering how you can offset the cost of living, especially right now. Fortunately, there are things you can do. First and foremost, it's imperative that you take a small amount of money and begin investing or working on other types of passive income early on. The idea is to help you make more money while you're still working and then ensure that you continue to have an income after you retire.
If you do it correctly, you can end up living on the interest alone throughout your retirement. That means having a sizable nest egg that serves as a cushion in case something completely unexpected happens and forces you to burn through a rather large amount of money. As you’ll see, this sort of thing can happen with little or no warning, so it’s crucially important that you are prepared.
Handling Unexpected Health Care Costs and Changing Jobs
Unfortunately, there is always a possibility that you could have some type of major health crisis that's just around the corner. It is a distinct possibility for all of us and it's something that must be planned for. Otherwise, it can catch you off guard and turn your finances into an utter disaster. If you're offered healthcare through your work, great. The question is, how are you going to secure similar coverage after you retire?
It's imperative that you find a good plan and know that you're covered as opposed to merely hoping for the best. The same is true with changing jobs. If your employer offers a retirement account, take advantage of it but don't count on that exclusively. Pensions can be wiped completely out. It's happened before and it will likely happen again. Learn how to invest, get a side hustle, do whatever it takes to make enough money to put your own money in a high-yield, high-interest savings account and then invest a portion of that money on your own. Don't count on your pension to do the job for you.
At the end of the day, you can definitely make it work if you want to retire at age 55. Like most other things worth doing, it requires more than its fair share of planning and a lot of hard work. If you plan on retiring to another part of the world that has a lower cost of living than what you're currently experiencing, you might be able to live it up during retirement without ever feeling like you're even threatening the majority of your retirement income.
The sooner you start thinking about it and the earlier you start saving, the better. That being said, it's never too late to make changes. Even if you're in your 40s, there is still time to save for retirement and enjoy the life you've always wanted. You just have to make up your mind that you're going to do it and then follow through.
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Written by Allen Lee
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