Retirement Benchmarks: Why Early Retirement Needs a Higher Number
While common guidelines suggest having eight to ten times your annual salary saved by the traditional retirement age of 67, retiring earlier at 62 changes the math significantly. Not only do you have fewer years to accumulate savings, but your retirement funds will also need to stretch over a longer period. Delaying your Social Security benefits is often advisable, which means your savings will be your primary income source in the crucial first years. This longer draw-down period, combined with reduced Social Security benefits, necessitates a higher savings multiple.
The Early Retirement Salary Multiple
For those looking to retire at 62 and maintain their pre-retirement lifestyle, some financial experts recommend aiming for a savings target of around 14 times your annual income by that age. This higher multiple helps account for the longer retirement period and the reduction in early Social Security benefits. A simpler way to estimate is using the 25x rule, multiplying your expected annual expenses by 25 to get your target savings goal. However, for early retirement, some suggest a more conservative approach like the 33x rule to account for the longer period your savings must support you.
For example, if your annual salary is $100,000 and you plan on needing 80% of that income in retirement, your annual expenses would be $80,000. Under the 25x rule, you would need $2 million ($80,000 x 25), which is 20 times your current salary. The 14x multiple for early retirement (or more conservatively, the 33x expense multiple) is a prudent way to build a financial cushion for the unexpected.
Factors That Define Your Personal Retirement Number
The idea of a simple salary multiple is a helpful starting point, but your personal circumstances should ultimately guide your savings strategy. Your unique retirement number is influenced by several critical factors:
- Your Desired Lifestyle: Do you plan to travel the world or lead a more modest life at home? Your post-retirement budget is a primary determinant of how much you need. Downsizing your home or moving to a lower cost-of-living area can significantly reduce your required nest egg.
- Healthcare Costs: Retiring at 62 means you will have to cover your own healthcare costs for three years until Medicare eligibility begins at age 65. This can be a substantial expense, especially if you have chronic health issues. A Health Savings Account (HSA) can be a valuable tool to help with these costs.
- Social Security Strategy: Claiming Social Security at 62 results in a permanently reduced benefit—up to 30% lower than if you waited until your full retirement age of 67. Your savings must bridge this income gap. Delaying Social Security to a later age, even to age 70 for maximum benefit, can substantially boost your monthly income later on, taking pressure off your investment portfolio.
- Taxes and Inflation: Inflation can quietly erode the purchasing power of your savings over time. Your investment strategy must generate returns that outpace inflation to preserve your lifestyle. Furthermore, don't forget that withdrawals from traditional retirement accounts will be taxed, which effectively reduces your available income.
- Market Volatility: Retiring during or shortly before a market downturn is a major risk, especially when you are withdrawing funds early. This is known as sequence-of-returns risk. Having a more conservative asset allocation and a flexible spending plan can mitigate this risk. Having a portion of your portfolio in more stable, liquid investments can also protect you.
Creating Your Personalized Retirement Plan
Building a robust retirement plan for an early exit involves a few key steps:
Maximize Savings Aggressively
If you want to retire early, saving the standard 15% of your income is often not enough. Consider aiming for a savings rate of 30% to 50% or more, depending on how close you are to your goal. For those aged 50 or older, take advantage of catch-up contributions to your 401(k) and IRA to accelerate your savings.
Strategize Withdrawals
Develop a strategic withdrawal plan that accounts for the fact that your savings need to last longer. The traditional 4% withdrawal rule, which suggests withdrawing 4% in the first year and adjusting for inflation, is a starting point, though some experts now recommend a more conservative rate for early retirees. A flexible approach, where you withdraw less during poor market years, can also increase the longevity of your portfolio.
Model Different Scenarios
Use a reliable online retirement calculator to model different scenarios. Input variables such as your desired retirement age, estimated expenses, and potential market returns to see how different savings rates and withdrawal strategies impact your financial future. This allows you to stress-test your plan and make more informed decisions.
Consider Additional Income Streams
To ease the financial burden on your portfolio, consider alternative income sources in early retirement. This could include working part-time, exploring gig work, or generating passive income from investments like real estate. This extra income can provide a cushion and reduce the need to withdraw from your main retirement accounts, particularly during early years when you are not yet collecting Social Security.
Conclusion
The number of times your salary you need to retire at 62 is not a fixed, universal answer but a personal calculation based on your lifestyle, health, and financial strategy. While general benchmarks suggest saving 8 to 10 times your salary by traditional retirement age, an earlier retirement at 62 could necessitate a higher multiple, such as 14 times or more, to compensate for reduced Social Security benefits and a longer retirement period. The key is not to get fixated on a single number but to develop a comprehensive plan that accounts for all variables, from healthcare costs to inflation, and to save aggressively to meet your goals.
Comparison of Savings Targets for Retirement
| Retirement Age | Fidelity Benchmark (x Annual Salary) | Target Based on 25x Annual Expenses | Key Considerations |
|---|---|---|---|
| Age 62 (Early) | 14x | Depends on expense level; can range from 15x-20x for many | Reduced Social Security benefits, private health insurance needed, longer retirement period. |
| Age 67 (Full) | 10x | 25x annual expenses | Maximized Social Security benefits, eligible for Medicare, shorter retirement period. |
| Age 70 (Delayed) | N/A | Less than 10x for many, due to higher Social Security payments | Maximized Social Security benefits, shorter retirement period, potentially lower withdrawal rates. |
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