January 11, 2022
As my wife says, if you want to retire early, you are doing something extraordinary. Therefore, your savings and approach cannot be average.
Normal Retirement Age is considered 67 since that is when you can receive full social security retirement benefits from the US Government. If you Retire at age 62, you receive partial benefits. https://www.ssa.gov/benefits/retirement/planner/agereduction.html
Take a look at the chart at the top of the page for a few moments. The purpose of the chart is to show what savings levels would allow you to retire early on your own finances and at approximately what age. These figures assume a 3.2% Safe Withdrawal Rate and Inflation Adjusted Investment Returns of 6.5% per year (Returns based US Equity Market 1900-2020). I assume constant income, spending, and savings per year.
On the left hand side of the chart is Savings as a % of your Salary. The Blue bars represent the number of years you would need to work in order to Retire given that level of Savings. The Orange bars are an estimation of the Age at which you could retire if you started working at age 23.
On one extreme, if you are able to save and invest 70% of your Salary each year then you could retire in only 10 years (blue bar at the bottom left). You would be 33 years old if you started when you were 23.
At a Savings rate of 40% each year, you could reasonably expect to work for 23 years and retire at age 46.
At a Savings rate of 30%, you could expect to work for 28 years and retire at age 51. To me, this seems like a feasible savings and investment target for many people. However, how many individuals do you know who have retired at 51? Is it because they were unable to save this percentage each year or simply because they never set the goal or did not desire to retire early?
Let’s go through some data so we can see more clearly some pitfalls and opportunities.
First, we need to earn money so we can start working. Preferably, we would like to earn more money vs. less and decrease our risk of unemployment. According to the US Bureau of Labor Statistics, one of the best ways to do this is to increase our level of Education:
https://www.bls.gov/emp/chart-unemployment-earnings-education.htm
Focusing in concentrations that are in demand is also critical. Personally, I graduated from college in 1999 Cum Laude (3.7 GPA/4.0) with a Degree in Zoology and a Minor in Neuroscience and was in the Golden Key National Honor Society and the Naturalist Club. Still, I was unable to find a job in my field so I worked in Technical Support at a computer company making $12-14/hour. I assessed my situation and recognized the need to gain education in an area with higher demand and a higher salary.
So, I applied for graduate school in order to gain my Masters in Business Administration. Two years later, I graduated as an MBA with a dual focus in Management Consulting and Supply Chain Management & Logistics and with a job making $78k at Ford Motor Company. I was Recognized by Faculty for Academic Excellence in Consulting and was awarded the RH Dillon MBA Fellowship, the Council of Logistics Management Scholarship, and the Sheldon B. Ackerman Award. I was the President of the MBA Business and Technology Association, an Officer in the Fisher Consulting Association, a competitor in the International Graduate Logistics Case Competition, and a member of Net Impact and the Operations and Logistics Management Association. The point is that advanced education and skills can significantly increase your salary and opportunities but you must concentrate on an area where there is market demand and work very hard to build your achievements in that area. If you continue to work hard and build your skills in high demand areas, you will eventually succeed.
However, do not just focus on College or Graduate programs, there are also many options with Associates degrees or Trades that can allow you to build your skills and increase your salary. A good place to start is the Occupational Outlook Handbook published by the Bureau of Labor Statistics. https://www.bls.gov/ooh/
The major pitfall to avoid here is failure to build skills, or to develop skills with low demand, and to work for minimal pay with high risk of unemployment.
Secondly, now that we have started working, we need to establish a savings plan that is in line with our retirement goals. Let’s take a look at how most households are performing in this regards.
The Bureau of Labor Statistics publishes a Consumer Expenditure Survey and the last release was based on 2020 data. I took the data and calculated the Savings as a % of After Tax Income broken down into various Income Brackets. The calculation takes the After Tax Income minus Annual Expenditures to determine the Estimated Savings in Dollars and also as a % of After Tax Income.
As we might expect, those with higher Salaries save a higher percent of their income. Those making less than $40k spend more money than they make. Those making $40-49k save a small amount (3%) and those making over $50k/year save between 12% and 40% of their income with the savings percentage increasing with income. This data is based on averages and there is the possibility to save much higher percentages in any income bracket.
The Median household income was $67,521 in 2020 according to the US Census Bureau (Note: I used Household Income instead of Personal Individual Income because the BLS Consumer Expenditure Survey data I used for Savings % included more than one person in a consumer unit so I believe those are also based on households). After Tax income should be around $59,898 USD at this level of household income. According to my analysis on savings, these households saved 12% in 2020.
Based on this review of data, early retirement (retiring before 67 and even before 62) is feasible for a significant portion of US households but significant actions are required.
High Income Households earning over $100k USD/year are saving at a rate of 24-40% (According to my analysis above based on data from the Bureau of Labor Statistics 2020 Consumer Expenditure Survey) Why are they not all retiring in droves between 46 and 59 years old?
Here are my thoughts on this:
- Households are very likely moving between income levels and only achieving the higher levels of income after many years of earning less.
- Households may not be investing their savings. Perhaps they save money one year only to spend it the next. Or perhaps they save money but only place it in a savings account or money market account earning very little from it.
- Households may be investing their savings but may not be achieving inflation adjusted investment returns of 6.5% per year (which are the average inflation adjusted returns on the US Stock Market from 1900-2020 according to the Summary Edition Credit Suisse Global Investment Returns Yearbook 2020).
- Possibly these households are in a position to retire early but elect not to retire due to enjoyment of their work, internal drives or ambitions regarding work or achievement, concerns over future investment returns, or a desire to further build their nest egg to allow for more spending after retirement.
Actions for High Income Households
- High Income Households (>$100k) are already saving quite a lot and if they maintain their savings at 30-40% of their salary and invest in US Index Funds, they should achieve Early Retirement. The focus for these households is tweaking their budgets to save even more and then investing wisely with low cost ETF’s and not making foolish decisions with their money or investments.
Medium Income Households earning between $50k-99k/year (which includes the Median US Household by Income) are saving at a rate of 12-19%. This group has the most opportunity to make relatively minor changes that would enable them to stretch for early retirement.
- These Households should boost their savings to 30% per year and invest those funds. If they can do this, they allow themselves the opportunity to retire early, possibly between the Ages of 51 – 59. This is achievable in my view but requires a budget plan.
Lower Income Households earning <$49k are close to break even and may be in heavy debt. These Households must consider more drastic measures to modify their budgets, increase their incomes, and decrease their debts.
Steps to be taken for Lower Income Households:
- Review your skills and determine what you can do to gain skills that are in higher demand. Can you increase your pay by getting a certification? Will your work help pay for your further education?
- List monthly expenditures by amount (I suggest using Personal Capital to track expenses for free). Reduce major categories of spend like rent, vehicles, etc. Live with roommates or with your parents or relatives. Move closer to work and sell your car. Take odd jobs or additional work.
- List debts by interest rate. If possible, refinance the debts at lower interest rates (right now is a good time since interest rates are low). Start paying off the debts in order of the highest interest rate debts first. If the interest rates on your debts are over 6.5% then pay them off as quickly as possible. If they are less than 6.5% then pay them off when they are due.
- Invest your savings in the stock market via low cost US Market Index funds like VTI. Just buy and hold them and do not try to time the market.
- The largest categories for spending in this income range are Housing and Vehicles. I would suggest roommates, elimination of a car if possible, or car sharing arrangements. I believe these households should be able to achieve 10% annual savings and 20% with some pain.
In my opinion, early retirement (retiring before 67 and even before 62) is feasible for a significant portion of US households but significant actions are required.
If my suggested actions were taken, a much larger portion of US Households, including those at the Median Household Income Level, would be able to achieve early retirement. (but don’t expect to retire to a 16th Century Mansion in the English countryside like in the photo at top. You can book dinner or a room there though https://hintleshamhall.co.uk)
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