You Need to Plan for an Early Retirement — Even If You Don't Actually Want One

You’re better off being ready, just in case.

Some people spend much of their lives planning for early retirement. They bank a large portion of their income in their 30s and 40s so that by the time their 50s or early 60s roll around, they’re able to wrap up their careers without financial stress.

But then there are those who are thrust into early retirement due to circumstances outside their control. In a recent MassMutual report, 48% of surveyed retirees say they ended their careers sooner than planned. And the most common reason was due to changes at work.

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The reality is that there are many reasons you may be forced to retire early, and your job situation is only one of them. You may have to wrap up your career due to health issues or the physical inability to do your job. Or you may have to become somebody else’s caregiver.

That’s why it’s so important to plan for an early retirement, even if that’s not your goal. If you wait too long to ramp up your savings efforts thinking there’s plenty of time, you could end up in a major financial crunch.

Save early, just in case

In the context of retirement savings, your plan may be to focus more on near-term expenses in your 30s and 40s, but then really ramp up IRA or 401(k) contributions once you turn 50. But the flaw in that plan is you’re not guaranteed to be able to keep working throughout that latter window.

If your line of thinking is to boost your savings every year from age 50 until 65 and retire then, your finances are apt to get thrown for a loop if you’re forced to end your career at 57. That basically cuts your core savings window in half.

A better bet? Start funding a retirement plan as soon as your finances are stable enough to do so. That may happen at age 25, 32, or 41. Either way, the sooner you start putting money into an IRA or 401(k), the sooner you can take advantage of compounded returns in that account that allow your savings to grow over time.

Let’s say you’re able to start funding a retirement plan at age 30 at $200 a month. You might continue to stick to that sum until age 50, at which point, you plan to contribute more.

You may not end up getting to fund a retirement plan during all of your 50s if you’re forced to retire early. But in this scenario, by contributing $200 a month to a retirement plan for 20 years from ages 30 to 50, you’ll have the potential to enter your 50s with a nest egg that’s already worth about $110,000. This assumes that your IRA or 401(k) generates an average annual 8% return, which is a bit below the average return of the S&P 500.

Meanwhile, let’s say your plan is to contribute $600 a month toward retirement from ages 50 to 65, only you’re forced to retire at 57. Assuming you only contribute that $600 a month for seven years and retain the same 8% return in your portfolio as above, by age 57, you’ll be sitting on almost $253,000, thanks to the money you put into your account during your 30s and 40s.

By contrast, let’s say you would’ve had $0 saved at age 50, and you’d then saved $600 a month for seven years at that same 8% return. In that scenario, by age 57, you’d be looking at just $64,000.

That’s why it’s so important to start saving for retirement early on. This way, if your career folds sooner than expected, you won’t be completely left in the lurch.

Coping with job changes at an older age

As mentioned above, job-related changes can be a big driver of early retirement. If you’re downsized out of a job in your 50s, you might struggle to get another one, forcing you to retire a good number of years ahead of schedule.

But in that situation, you don’t have to resign yourself to never working again. It’s true that it can be tough to get hired at a certain age due to preconceived notions on the part of employers. But the nice thing about the gig economy is that you can take advantage of it at any age.

If you plan to retire at age 65 and you’re laid off at 57, don’t assume you won’t be able to work for the next eight years. You may have different opportunities available, whether it’s freelancing in your former field or shuttling passengers around town for money.

Either way, early retirement must be on your radar, even if it’s not part of your plans. And the best way to prepare for it is to save from as young an age as possible.

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