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Can You Retire Early If You Started Late?

Can you retire early if you started late?It’s best to start saving in your 20s if you want to retire early, but life isn’t perfect. Many people didn’t save much in their 20s or 30s due to a variety of reasons. Some have low income. Some spend too much or take on a lot of debt. Stay-at-home parents rarely have income while they take care of the family. Some people got divorced and had to start over. The student loan is another big problem nowadays. Lots of young folks now start out with a big negative net worth. Lastly, most people don’t understand personal finance and rarely consider saving for retirement when they’re young. It’s rarely easy to save when you’re young.

What if you discovered FIRE (financial independence retire early) in your 40s or 50s? Is it possible to retire early if you started late? To me, early retirement means retiring before you turn 60 so there is still time. It will be more difficult because compound interest works best when you’re young, but older savers have a lot of advantages too.

Early retirement is easier for older workers

In fact, I think early retirement is easier for older workers. Why? Here are some of their advantages.

Less time in retirement

I retired when I was 38. That means I could have 50+ years in retirement. I need more savings to fund my long retirement. Instead of going straight into full retirement, I choose to blog part-time and slowly ease into it. My wife is also still working full-time. She plans to retire early too, but she’s not quite ready yet. This means we can put off withdrawal until later. Meanwhile, we’re building our passive income and it should surpass our spending by the time Mrs. RB40 retires. You can read more about our unusual retirement withdrawal plan here. Older workers won’t have to plan for such a long retirement like that.

Retirement benefit coming sooner

I still have 20 years left until I start receiving Medicaid and Social Security benefit at 65. For older workers, this gap is much smaller. If someone retires at 60, there are just 5 years left until they can start receiving these benefits. They only need to figure out how to bridge these 5-10 years gap instead of 20+ years. In particular, healthcare is a big problem for Americans. Many of us choose to work longer just for employer-subsidized health insurance.

You don’t need to be too conservative

I think early retirees in their 30s and 40s need to be much more conservative. There are many uncertainties in the longer retirement period. My main financial goal is to generate enough passive income to pay for our cost of living. That’s quite difficult. For older savers, I don’t think they need to do this. Their goal should be less conservative. They can go with the 4% safe withdrawal rate. This rule of thumb says you can withdraw 4% of your asset and it should work over 30 years of retirement. Your net worth will drop over time, but it should be enough.

Trying to achieve 100% FI ratio translates to around 2-2.5% withdrawal rate for us. Young retirees need to save more so we can put off depleting our retirement savings until we’re older. Or work part-time to put off withdrawal.

Less uncertainty

There is a lot of uncertainty in the future. The longer out, the more unknown we’ll have. For example, Social Security will be there for you if you’re 55. They aren’t going to change the rule on you. Even for me (45,) I think Social Security will be mostly unchanged. However, there probably will be some changes for people in their 20s. The income cap will most likely increase and the retirement age might be pushed out. They’ll have to fix Social Security at some point.

The stock market and other investments are also uncertain. For me and older savers, we already benefited from years of investment gains. The younger folks might not have this benefit. There are just a lot less uncertainty if you’re older. It’s easier to do the calculation. You pretty much know what to expect in retirement if you’re 55.

Less family obligation

Older workers generally have less family obligation than people in their 30s and 40s. We have a son and he is still in grade school. It will take at least 10 more years before he goes to college and starts his own life. Our parents are all getting older and they need more help. Life is most stressful in your 40s. There are too many things on our plate at this age.

For older workers, life should become less stressful. Hopefully, the kids are out of the house and get on with their own lives. It might be possible to downsize or move somewhere more affordable at that point. You have more freedom to change.

More solid finance

This one is different for everyone, of course. For younger folks, their net worth is usually very low when they discover FIRE. It will be a very long journey for even the most frugal 22-year-old new college graduate. At 50, you should be way ahead of most young people. Hopefully, you’ve been saving for a while and have some home equity. These assets will help ease the path to early retirement.

Case study

One of our readers, Liz, asked – can she retire early if she started saving late? This post is for her and other older workers who started saving late. Let’s see if we can help her. Here is Liz’s info.

  • Age: 52
  • Family: Single. Kids are out.
  • Income: $60,000/year
  • Debt: $30,000 (HELOC)
  • Savings: $100,000 in retirement accounts. $52,000 in work pension.
  • Home: $350,000 in home equity. No mortgage, just the HELOC.
  • Healthcare: Liz is Canadian so she doesn’t have to worry much about healthcare.

Currently, she saves about 25% of her income, uses 25% to pay down the debt, and spends the rest. Her debt should be gone in less than 3 years. It looks like she spends about $30,000 per year and she is happy with that.

Future income

  • Pension: Liz could receive up to $9,600 per year if she retires at 65. However, she doesn’t want to work that long. She will receive less if she retires earlier. I’ll just have to make some estimates here.
  • CPP: Canada Pension Plan. This is similar to Social Security in the US. Liz will receive about $5,000 per year from CPP if she starts at 60.
  • OAS and GIS: Old Age Security and Guaranteed Income Supplement. These are Canada’s pension program for seniors age 65 and older. She will probably receive about $9,000 annually from these.

Lifestyle

Liz is content with her current lifestyle. She lives modestly and isn’t too interested in travel. Her biggest goal is to continue to live in her modest bungalow until she’s around 70 years old.

Crunch the numbers

It looks like Liz is on track for regular retirement. She has some retirement savings and will be able to ramp it up once the HELOC is paid off. Her cost of living is also relatively low and she has no mortgage. It looks like she will be in good shape if she retires at 65. However, it is a lot more uncertain if she wants to retire early.

Her expense is relatively low at $30,000 per year, but she still needs to fund that somehow. Also, her future income will drop if she retires early (pension and CPP.)

Retire at 65

I put her numbers into the Personal Capital’s Retirement Planner. As I expected, it looks good if she retires at 65.

Retire 65

She will have time to build up her retirement savings and her retirement benefits will be larger. The 2nd big bump is when she sells her house at 70. This looks good.

Retire at 60

Unfortunately, it doesn’t look as solid if she retires at 60 according to the Retirement Planner.

retire 60

I assume her work pension will be about $4,000 per year if she retires at 60.

Working until 60 will give her time to build up her retirement savings to about $250,000 to $300,000. That’s a better amount than what she has now. After she retires at 60, her savings will deplete steadily until she sells her home. This will give her savings a big bump, but the withdrawal rate will be even steeper afterward. That’s because she’ll probably pay more for housing. I estimate an additional $16,000 per year which is really low.

IMO, this chart doesn’t look too bad. Liz can make some minor adjustment and she would be okay. For example, if she drops her spending about 10%, the graph will look much better. That’s not a huge change. Another big variable is her house. If the housing market continues to do well, she might be able to sell it for quite a bit more than we estimated. That’s uncertain, though.

Retire at 57

Liz mentioned that she’d like to retire soon after she paid off her debt if that’s possible. However, it doesn’t look good at all.

Retire 57

5 years isn’t quite enough time to build up her savings. Also, her pension income will be less, around $3,000 per year.

Her retirement savings won’t be enough to support her current lifestyle for long. It will run out by the time she is 65. At that point, OAS and GIS will kick in, but they still won’t be enough.

If Liz really needs to retire at 57, then she will need to be more creative.

Work part-time after early retirement?

A good option is to work part-time after she retires at 57. A little active income goes a long way in retirement. Here, I added $15,000 per year in part-time work for 10 years after she retires. This improves the projection tremendously.

work part time after early retirement

The tail end of this chart still doesn’t look great, though. Liz probably will have to cut back a bit to stretch out her savings.

My recommendation

Liz is on the right track and I’m pretty sure she can retire before 65.

I suggest she works for 5 more years and then evaluate her retirement plan again. At that point, the picture should be much clearer.

I think she will be able to retire at 57 if she can work part-time for a while. Otherwise, it’s probably best to continue working until she’s 60.

For now, stay on track and keep saving.

Lastly, I think Liz should check with CPP about her retirement benefit. She was a stay-at-home mom for many years so she didn’t have much income during that time. Can she get a spousal benefit or something like that?

Mrs. RB40’s mom doesn’t qualify for Social Security benefit by herself, but she got a spousal benefit. Canada must have something similar. Check it out.

Here are CPP’s Child-rearing provisions. This might help Liz increase her CPP benefits. Thanks, Tigermom for sending us this link.

Liz’s questions

Q: How much should someone my age have saved?  How far behind am I? 

A: Liz is ahead of the average American household, but that’s not saying much. Americans are horrible at saving for retirement. I think she is a bit behind the average Canadian households, but not by much. If she focuses on saving and investing, she should be in good shape by the time she retires. The great advantage she has is that her house is paid off.

Generally, someone her age should have 4-6 times their annual salary saved up. That’s about $300,000 at her current salary. She’s in the ballpark if you count home equity.

Q: What can I do to increase the profits on my investments without really risking the money I have invested?  Should people close to retirement have any risky investments?  

A: This one is tough. If I was in her position, I would be relatively conservative. I’d invest in index funds and target the allocation split to 70/30, stock/bond. As retirement gets closer, I’d put more in bond. Maybe 60/40? Liz may need to talk to a good financial planner if she needs more help with this.

Q: Is there any hope of me retiring before age 65?  Is there any hope for early retirement?  

A: I think Liz has a good chance at early retirement. It looks like she can retire at 60 with just some minor adjustment. Maybe at 57 if she is willing to work part-time for a bit.

Q: I would like to retire when my debt is paid off in 3 years.  Any chance that might happen?

I don’t think that’s a good idea. That’s just 3 years away and she won’t have enough time to build up her retirement fund. I don’t think it’s going to work unless she receives a big windfall or something like that. I think retiring around 57 to 60 is much more realistic.

Okay, that’s it from me. I’d like to thank Liz for sharing her numbers! All in all, it is quite possible to retire early if you started late. I think retiring around 60 is quite good. That’s still young as long as you’re healthy.

Do you think it’s possible to retire early if you started late? Do you have any advice for Liz?

*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. Their Retirement Planner is great. It’s flexible enough to take all sorts of input like in Liz’s case above. It’s a very helpful starting point for retirement planning. Check them out if you don’t have an account yet.

Image by Rosemary Ketchum

The post Can You Retire Early If You Started Late? appeared first on Retire by 40.

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