Can You Retire Early If You Missed Years Of Saving?

Early retirement is a dream of many individuals. Perhaps you can achieve this goal if you commit to saving regularly. What if recent difficulties have compelled you to temporarily halt your retirement savings? Many consumers have had trouble keeping up with the cost of living increases caused by inflation this year. As a result, you might have had to cease making payments to your IRA or 401(k) plan so that you could maintain paying your rent or buying groceries.

Due to job loss or unexpected costs in 2020 and 2021, many people put their retirement savings on hold during the pandemic. To keep working while schools were closed, let’s say you had to pay an extra $10,000 for daycare. This is money you might have saved for your retirement that didn’t.

It’s reasonable to worry that missing out on retirement funds for a few years may negatively impact your ability to retire early. You shouldn’t assume that you’ve already missed your chance at that.

There’s a chance you can get caught up. Let’s imagine you stopped contributing to your IRA or 401(k) for a few years, and now, at age 35, you have $50,000 in those accounts. Since we’re beginning 2024 with still-high living expenditures, let’s also suppose you won’t be able to fund your savings for another year.

Your target retirement age may be 62, when you may begin receiving Social Security benefits, and when it would still be considered a very youthful age to leave the labor market entirely. Assuming you start saving $500 a month at age 36 and keep it up until you’re 62, you’ll finish with roughly $850,000 if your IRA or 401(k) generates an average annual 8% return, which is a little below the stock market’s average.

Withdrawing 3.5% annually from an $850,000 nest fund yields around $30,000 yearly income, enough to retire comfortably in your 40s. If you’re prepared to live frugally and get a monthly Social Security income (although a reduced one if you join up before your full retirement age), you may be able to retire early.

There are a variety of rates you may experiment with beyond the suggested 3.5% yearly withdrawal rate. While 4% has long been the recommendation of financial experts, early retirees should err on the side of caution because their funds may need to endure longer.

Of course, this is only an illustration. However, the point is that you can easily make up for a few years of non-participation in a retirement savings plan like an IRA or 401(k). If this is the case, keep working toward your objective. Once your situation improves, you should push yourself to do everything possible to compensate for the lost time.

It’s important to define what you mean when you say “early retirement.”

For some, “retirement” implies never having to work again. However, you don’t have to go that path, especially if money is an issue. You may, for instance, opt to retire in your late 50s or early 60s and spend a few years doing something you enjoy or that has deeper significance for you, even though the salary is much lower. You might also decide to switch from working full-time to part-time.

Achieving an early retirement may be simpler if you were more open to redefining what that means. This is the case whether or not you can consistently contribute to a retirement account like an IRA or 401(k) during your working life.