Can you retire 5 years early? Here is how to find out.
Want to retire early? Adding a few percentage points to your savings rate can lengthen your retirement, a new study found. This is how to figure out how much money you’ll need. Jacob Lund/Shutterstock

A luxurious retirement may seem unattainable, which can make saving for it — specifically the recommended 10% to 20% of earnings — all the more challenging to prioritize. After all, your financial to-do list is long and retirement is still decades away. Better to focus on lowering that credit card balance, perhaps, or finally start saving for a home.

Yet research suggests that the most efficient way to feel happier is by buying yourself more free time. And by upping your retirement savings, that’s effectively what you’re doing anyway — buying yourself more time when you will no longer have to keep your nose to the grindstone.

So just how much time does an extra percentage point of savings here and there get you, exactly? That’s the question behind a new working paper from researchers at Stanford University and George Mason University, which studied the trade-offs between saving more of each paycheck and the prospect of simply working longer. The study compared a variety of savers and scenarios and examined the impact of small changes to their retirement savings contributions over 30 years.

The study authors found that adding 1 percentage point to your retirement savings will lengthen your retirement by up to six months, assuming you receive Social Security. “Delaying retirement by [three to six] months has the same impact on the retirement standard of living as saving an additional 1 percentage point of labor earnings for 30 years,” the authors wrote.

That might not seem like a lot of extra leisure time, but it’s also important to note that a single percentage point is not necessarily a ton of money. If you make $50,000 per year, for example, the difference between saving 2% and 3% of your salary amounts to $500 — roughly $21 per paycheck, assuming you receive two paychecks a month.

Want to retire not just months — but years — early? Read on.

How to plan for an earlier retirement

Luckily, saving for retirement gets even easier if we adjust a few of the assumptions the study authors made about typical savers. For one, they assume the saver didn’t receive any salary increases at all. But if you avoid lifestyle inflation and put your raises and bonuses into a tax-advantaged retirement account, for example, you’d certainly be able to get away with keeping a little more of each paycheck.

And hands down, the best thing you can do to set yourself up for retirement is to start saving earlier. In all of their models, researchers looked at a hypothetical saver who didn’t start saving for retirement until they were 36.

Indeed, a 22-year-old saving as much as a 30-year-old starting from scratch could have an extra $1 million by the time they’re 70. As the authors of the new study noted, “Our key insight is that some decisions, such as how much to save in retirement accounts going forward, become less powerful at older ages in changing the affordable retirement standard of living.”

How much should you save if you actually want to retire early? Retirement calculators, like the ones offered by investment managers Vanguard and Fidelity or personal finance sites like Bankrate, can help you ballpark how much extra income you’ll need — on top of Social Security — using a variety of different incomes and time frames.

A 25-year-old earning $50,000 annually and who hopes to live on about 85% of their current salary, for example, needs to save about 15% of their income to retire by the age of 67, according to Vanguard’s calculator. That 15% could be more like 10% of your salary depending on whether you receive an employee match, which 42% of companies offer, according to the Society of Human Resources Management.

But if you want to retire at 62 instead, you’ll need to dig a little deeper and sock away 24% of your income, according to Vanguard’s estimate (which also factors in Social Security earnings), to have enough to retire five years early.

Think outside the 401(k) to accelerate your savings

If you’re not covered by a 401(k) at work or just want other investment options, you can always stash money in an individual retirement account. With a traditional IRA, you can contribute up to $5,500 a year without paying taxes on the principal or interest until you withdraw your funds. You could also opt for a Roth IRA, for which contributions are not tax-deductible but earnings and withdrawals are generally tax-free (so long as you follow the withdrawal rules).

Whichever route you choose, always make sure you’re earning some kind of interest on your savings. The reason why the money you put away today is worth so much more in 10 or 20 years is partly because of the power of compounding interest. Even putting your funds in a savings account that earns a scant 1.5% annually is better than leaving it in a checking account that earns nothing — or worse, charges you a fee to effectively babysit your money.

Of course, the easiest way to save more for retirement is by earning more today. Check out the highest-earning industries for a potential career change, or consider kickstarting that side hustle to make some extra cash. Thirty years is a long time, more than enough to transform a hobby into a money-making enterprise or full-time job. Conversely, you might find you can reduce your current living expenses by relocating to a more cost-effective area.

True: Saving anything at all is tough when you’re faced with rising rents and stagnant wages. But it’s also likely that you’re underestimating the real payoff to getting an early start.

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