Three Keys to a Comfortable Early Retirement

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A couple of surveys came out in recent weeks that revealed major concerns among Americans about saving and investing for retirement.

Last week, an analysis by Charles Schwab (NYSE:SCHW) found that the majority of Gen Z workers between the ages of 21 and 26 want to retire at age 61 but are concerned about their ability to save enough while struggling to meet expenses.

In addition, a survey a couple of weeks ago from Bankrate revealed that 56% of all working Americans feel they are behind on their retirement savings, while 22% said they haven’t contributed to their retirement savings in the past two years.

The prospect of building a comfortable nest egg may feel overwhelming, but it is manageable with the right approach. Here are three keys to getting there — and maybe even early, with the proper planning.

1 . Set a goal. Don’t assume or guess

The Bankrate survey had an interesting data point that said 32% felt they needed more than $1 million to retire, while 18% said they would need between $500,000 and $1 million. Another 25% said they needed less than $500,000, while 25% said they didn’t know.

These numbers are all over the place, but you don’t have to guess or assume. Using some very simple calculations, you can determine the range that suits you. One easy rule of thumb is to base the amount you should have saved on your salary at different points in your life.

For example, at age 30, you should have an amount equal to 0.5x to 1x your salary. By 40 it should be 1.5x to 2.5x, and by age 50, it should be 3x to 6x your salary at that age. By age 60 it should be 5.5x to 11x.

These ranges are so wide because people have very different needs in retirement. On one hand, if you expect to have lower expenses or have already paid off your house, you might be on the lower end of the range. On the other, if you expect to travel extensively, need to support parents, or have a higher mortgage, you might be on the higher end.

For this hypothetical, let’s say you want to retire at 60 or 61. If you were making $100,000 by age 60, you would need $800,000 to $900,000 saved — if you were right in the middle of that range.

2 . Start early, and you don’t have to break the bank.

The Bankrate survey also said that some 22% haven’t contributed at all to their retirement in the last two years. If you are a young professional in the Gen X cohort, it is even more critical because the longer you have to let compounding work for you, the better off you will be. Further, the longer the runway, the less you actually have to take out of your paycheck to put toward retirement.

Running the numbers on a simple retirement calculator that can be found online is pretty revealing. If you invested $5,000 in an S&P 500 exchange-traded fund at age 25 and added $100 per month for 36 years until age 61 (assuming a 10% annual return, the average rate for the S&P 500 over time with dividends reinvested), you would have about $600,000 by age 61.

If you lost those first five years and waited until age 30 to start investing, you would have just $360,000. Although it’s only five years, the difference over time is huge — that’s the awesome power of compounding. It shows just how important starting early is.

For some, $100 a month may sound like a lot, especially when you’re younger and have lots of expenses to meet on a smaller salary. However, if you look at it as $25 per week, you can justify that by not getting lunch, breakfast or coffee out every day.

A study by Owl Labs released in September found that workers spend $51 per day, on average, when they work in the office, including $16 per day on lunch and $13 on breakfast and coffee. Just cut out lunch and breakfast one or two days a week and put that toward your retirement.

3. Get the full company match.

Not all workers have a 401(k) or some type of employer-sponsored retirement plan, but most do. If you do, the biggest no-brainer of all is to contribute enough to get the full company match. How much companies give as a match varies, but a good portion of them provide something like a 4% match. Thus, if your firm has a 4% match and you are not contributing to your plan or are contributing less than that, you are simply not accepting free money.

For example, if you are 25 and making $40,000 per year and you contribute just 2% of your salary to your 401(k) when the match is 4%, you’d have about $674,000 after 36 years, assuming a 3% annual raise and a 10% annual return.

On the other hand, if you contribute 4% and get the full company match, you would have about $1.3 million at age 61. Once again, it is free company money and the power of compounding at work. That $1.3 million would surely be enough to retire early — and comfortable.