These days, the vast majority of individuals plan to retire in their mid 60s. For starters, this is the range when Social Security benefits generally kick in, providing at least some modest level of monthly income. When supplemented with outside savings, be it traditional defined-benefit plans or the more recent defined contribution 401(k) plans, this retirement age can let nearly every couple or individual live comfortably in their golden years. (For related reading, see 7 Stable Investments For Your Retirement.)
To accelerate retirement, individuals will really need to get motivated in setting aside their own income for the years that come after being gainfully employed. Market returns could also provide a boost, but the last decade has proven extremely difficult for capital invested in the stock market. Additionally, interest rates have been on a steady decline since the early 1980s. The current interest rate on a 30-year Treasury bond is only around 3%. This makes it extremely difficult to earn a sufficient income off capital saved up over the years.
Below is a brief summary of the savings amount needed to ensure a $50,000 annual income rate. Back when interest rates were closer to 5%, an individual had less of a hurdle by needing to save only about $1 million by retirement. These days, the average blended interest rate (including a mix of shorter-term, medium-term, and longer-term bonds), is only around 2%, suggesting that the sufficient savings level has more than doubled to $2.5 million.
The above simplistic example fails to take into account a number of other variables, including any Social Security income, potential boost that can come from keeping an asset allocation in equities or other assets that can grow over time (venture capital, private equity, and hedge funds come to mind), as well as potential inheritance levels or other income sources. However, it still does give some indication that individuals will likely need to be millionaires before even being able to consider retirement.
A challenging stock market, low interest rates and uncertainty over future Social Security benefits only add to the hurdle rate of an individual wanting to retire early. For example, someone that desires to retire by age 50 will have 15 years less time to build a sufficient next egg. Below is a discussion, using the retirement income calculator from bankrate.com, of how some of these variables might play out to reach an annual income of around $50,000 per year. (To learn more, check out 5 Retirement Planning Mistakes You Might Already Be Making.)
For an individual that is 35 years of age with very modest initial savings, it means only 15 years to save for retirement. With an initial savings level of only $10,000, this individual would need to save approximately $33,000 per year to end up with $1 million in savings by age 50. Implicit in these estimations are the following assumptions: an 8% annual return on the portfolio (meaning a healthy mix of stocks), 2% annual return after retirement, and tax rate of 33%. It also assumes surviving 25 years after retirement, or until age 75.
Starting a retirement plan early certainly has its advantages. Starting the same plan above at age 25 means only needing to set aside roughly $12,000 annually to reach the same retirement level. And on the flip side, waiting too long can make realizing a healthy savings level upon retirement nearly impossible. Waiting until age 45 under the above scenario would mean having to set aside more than $150,000 annually to reach a seven figure savings level just five years later.
The Bottom Line
To save between $1 million and $2 million by retirement, the best bet is to start saving modestly when just starting working, or by one's early 20s. This combined with decent stock market returns could mean the ability to retire by age 50. Of course, reaching a six-figure salary could certainly help accelerate those retirement plans, as could an inheritance, winning the lottery, or some other form of luck, including double-digit annual stock returns. (For additional reading, see 5 Ways To Afford Early Retirement.)