We Millennial’s have our entire financial future squarely in front of us. If we act accordingly we can easily become Millennial Millionaires and one day retire early. Envisioning an early retirement as a Millennial should be on all of our radars because the worlds single greatest wonder is on our side; the power of compounding interest and time. If we all act accordingly, financially-speaking, retiring early as a Millennial is a very achievable goal.
Early Retirement for Millennials
So what exactly does it take to retire early as a Millennial? First off, you have to save, and save aggressively. Most financial planners give all investors a conventional retirement savings target of 10% to 15% of your income, spanning a 40 year career. And if you are a Millennial and saving the latter already, 15%, you’re doing a fine job, and well above the average America. But retiring early isn’t what the “average” American does. The average American spends more than they make, buys goods they can’t afford, and fails to save for retirement. So if you want to achieve more than this and have your sights set on an early retirement as a Millennial, you are going to have to tighten up your budget and save more like 25% to 30% of your annual income.
Let’s imagine you’re a 25 year old Millennial making $55,000 a year. If you saved 30% of your income and also received an employer match of 5%, therefor making your annual retirement savings rate 35%. That savings rate of 35% annually would equate to $19,250 or $1,600 per month ($1,375 of which you contribute). If you invested that much annually for 30 years you would end up with $2,175,000 by age 55 (assuming an 8% return). The stock market has historically averaged 10%, so if you received those returns you’re looking at a retirement nest egg of $3,150,000 by age 55.
If at the age of 55 you ended up with a nest egg of $2,175,000, you could safely withdraw 2.5% of your money annually, giving you $54,000 a year to live on. The traditional withdraw rate most financial planners recommend is 3% to 4%. However, if you plan to retire early you must lower that rate and be a bit more conservative. A 2.5% withdraw rate at age 55 gives you a 90% probability of your money lasting until age 90.
If you received that historical stock market return of 10% and ended up with $3,150,000 at age 55, then you could safely withdraw nearly $79,000 annually. Both of these annual retirement incomes would be lower than your current working income in your early 50’s (given inflation and raises), but once retired you lose one huge monthly budget item – your retirement savings. You were used to saving 30% of your income for retirement and effectively living on 70% of your take home pay. These retirement income figures should be closer to that number than you think. And you would be retired early!
The other factor I didn’t mix in to the equation is your biggest monthly budget item; your mortgage. Most mortgages take up approximately 20-25% of your take home pay. So with a paid for home and a retirement savings rate of 30% through your working career, once retired you can easily live on less because you were used to putting out 50% of your pay towards the mortgage and retirement accounts. So now living off $54,000 to $79,000 at age 55 in an early retirement doesn’t sound so bad, huh?
We Millennial’s really just started our working careers and have a ton of time left in the professional workspace. Even those of us Millennial’s who wish to retire in our 50’s still have two to three decades worth of savings left to do, which gives you plenty of time to let your money work for you via compound interest.
Making Retiring Early Your Goal
Regardless of the age you wish to retire, whether it be in your 40’s, 50’s or 60’s, setting an attainable goal of allowing yourself this possibility at one of those ages is wise. And just because you say you want to retire at 50, and saving diligently to do so, doesn’t necessarily mean you have to fully retire at that age. Perhaps you still feel the strong desire to continue longer down your career. That’s great…that just means you’ll have even more money saved for retirement once you do decide to hang it up. Or can you scale back significantly and work part-time doing something else you love or consulting in your previous field part-time. This would ease you into retirement soften anyways.
Or, on the negative side, you may lose your job at a later age and have a tough time finding a new gig, again due to your age. Or your health may not allow you to work full-time any longer, or a family member’s health may be an issue you need to care for. However you slice it, saving prudently so that you are financially independent early than expected (say in your 40’s or 50’s), is only going to give you flexibility and options as you age. Again, you can always keep working and saving if you decide an early retirement isn’t for you. But I am going to save like crazy now so that I can one day be financially independent and have a multitude of options as I approach closer to retirement.