The dream of early retirement has been around for decades – many of the ideas behind it come from the 1992 book Your money or your life. In recent years, online communities have popularized the so-called FIRE movement, where FIRE stands for “financial independence, early retirement.” A financial independence subreddit currently has 2.2 million members.
It’s understandable why the movement appeals to so many people. Being able to quit your career at a young age gives you more time to enjoy life without the daily grind of working for a living. But how many people actually do it? Here is the answer.
Only a small percentage of Americans retire early
Few Americans retire early, but the exact amount depends on your definition of early retirement. Here is the percentage of retired Americans in four age groups, according to retirement data collected by The Motley Fool from 2016 to 2022:
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40 to 44: 1 %
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45 to 49: 2%
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50 to 54: 6%
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55 to 59: 11%
So if you expect to retire in your 30s or 40s, that’s rare. Only 1% of Americans ages 40 to 44 are retired, and only 2% of Americans ages 45 to 49 are retired. We don’t have data on how many people in their 30s are retired, but it’s probably far less than 1%.
If you want to retire at 50, that’s more common, although still far from the norm. Even among Americans ages 55 to 59, who are just a few years away from claiming Social Security, about 9 in 10 are still working.
Despite its increasing popularity, early retirement has not become more common. In fact, it happens less often than it used to. From both 2002 to 2007 and 2008 to 2015, retirement rates were higher for people in their 40s and 50s.
What does it take to retire early?
Early retirement and traditional retirement have the same end goal: save enough money to survive for the rest of your life. The difference is that early retirement must take place much earlier. That’s why the FIRE movement is about maximizing your savings rate – the portion of your income that you save and invest.
For most people, a savings rate of 15 to 20% is a smart goal. Early retirees typically save at least 25%, often much more. Some manage to save 50% or more of their production.
It is difficult to achieve and maintain such high savings rates. The people who do this typically either earn high incomes, severely limit their spending, or both. If you earn a high income, things are much easier for you. If not, you can still do it, but you have to be strict about how much you spend.
Save for retirement but enjoy the present
Everyone needs to plan for their retirement. If you want to retire earlier than most, you’ll need to save accordingly.
Make sure that the goal of early retirement does not affect your quality of life in the present. Some people practice extreme frugality, cutting out virtually everything they don’t need in order to increase their savings rate. There are even those who live in vans to save on rent.
You don’t have to constantly cut back on spending to save for retirement. There are other ways to speed up the process, including:
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Invest heavily in the stock market. Historically, the stock market has an average return of about 10% per year. Make sure you invest the majority of your portfolio in stocks to maximize growth.
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Save through tax-advantaged retirement accounts. Anyone can open an Individual Retirement Account (IRA), and you can deduct contributions from your taxable income. If you meet income limits, you can also open a Roth IRA, which allows you to make tax-free withdrawals in retirement (but not deduct contributions from taxes).
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Make the most of your 401(k) if your employer offers one. Another popular way to save is a 401(k), a company retirement plan. Many employers even match contributions up to a certain amount, so take full advantage if your employer does.
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Increase your income every year. If you want to increase your savings rate, making more money is your best option. Negotiating a raise, looking for a new job, and starting a side business are all options that can help you earn more.
There is nothing wrong with being careful with spending within reason. But there is no point in suffering for years just to retire as quickly as possible. It is better to take a more balanced approach. Find a plan that fits your retirement and allows you to enjoy life in the here and now.
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“Here’s How Many Americans Are Actually Retiring Early” was originally published by The Motley Fool