How to Retire Before Your Mom and Dad

Like most Americans, you probably expect to work several decades before retiring around the age of 65. Or perhaps retirement isn’t even on your radar because you don’t think you’ll ever be able to afford to leave your job.

That’s actually how many people feel. The National Association of Personal Financial Advisors found that 1 in 3 Americans don’t think they’ll ever be able to retire. But what if there were a way to ensure that you could not only be able to retire but to retire well before the traditional age of 65? What if you could actually retire before your parents do?

In his new book, “Retire Before Mom and Dad: The Simple Numbers Behind a Lifetime of Financial Freedom,” Rob Berger says it is possible to retire early if you want. Berger, the deputy editor at Forbes, says you don’t need a six-figure salary or to give up all of life’s pleasures to save enough to achieve financial freedom in your 50s, 40s or even your 30s.

Why compound interest is the key to retiring early

You might be thinking that there’s no way you could ever save enough to retire – let alone retire early – if you earn less than $100,000. After all, if you make $50,000 a year and set aside 5% of your income annually ($2,500) for 45 years starting at age 22, you’d have only $112,320 by the time you reached 67. That could get you through a few years of retirement, but certainly not a few decades.

However, Berger points out that the richest people in the world didn’t accumulate their wealth just by working and saving what they earned. Most of their wealth came from compound interest on the money they invested.

“The vast majority of your wealth won’t be the actual dollars you save,” Berger says. “That will get the ball rolling. The actual wealth comes from the returns on those dollars as you invest them wisely. That is the key concept we have to understand.”

Berger refers to compound interest in his book as the “Money Multiplier.” Compound interest is the interest earned on the money you invest plus the interest that is accrued. In short, compounding helps your investments grow faster.

So, using an example in “Retire Before Mom and Dad,” if you invest 5% of your $50,000 income annually in a mutual fund and earn a 9.3% annual return, you’d have more than $1.7 million after 45 years rather than just $112,320 by stashing your money someplace it didn’t earn interest. (That 9.3% is the average annual return since the 1920s of a portfolio of 70% stocks and 30% bonds, according to Vanguard. (Of course, with investing, there can be no assurance that any particular rate of return can be achieved.)

Thanks to compound interest, it doesn’t take a six-figure salary to invest and have more than $1 million for retirement.

How much to save to retire early

To retire early, you’ll need to save and invest at least 20% of your income annually. “If you save 20% of your income and earn an average rate of return, it should take you roughly 30 years to achieve financial independence,” Berger says.

So if you started saving diligently in your 20s, you could retire in your 50s. If you can get your savings rate to 25% or 30%, you’ll speed the process up more, he says. Ultimately, the goal is to save enough to cover 25 years’ worth of expenses. So if your annual expenses are $50,000, you would need to have a nest egg of $1.25 million. If you have that much invested, then you should be able to withdraw 4% of your balance – $50,000 – each year without running out of money, assuming the markets stay relatively steady throughout your retirement.

How can you do that if you retire at, say, 40 and will need enough money to support yourself for 40 years? Because if you’re only withdrawing 4% a year, the bulk of your investments will continue to grow. Berger goes into a lot more detail in “Retire Before Mom and Dad” about the 4% rule, but that’s the gist of it.

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Strategies for boosting your savings

Saving 20% or more of your income might seem tough – maybe impossible – if you have other financial priorities such as student loan debt or credit card bills. “I don’t pretend that is easy,” Berger says. But it can be possible if you’re willing to change your spending habits.

“Lowering your expense is like lowering the hurdles in an Olympic race,” Berger writes in his book. “It makes reaching Financial Freedom easier.” He suggests using these strategies to spend less so you can save more:

Go without something

Think of a small daily expense you’d be willing to cut. Maybe it’s lunch at a restaurant, a glass of wine with dinner or coffee from a coffee shop. Perhaps it’s not something you spend money on daily, but weekly or monthly – such as manicures, massages or car washes.

Berger recommends living without one of those things for at least 21 days. By the end of those three weeks, you might realize that you didn’t really miss that thing you gave up. Then you could put that small dollar amount in savings, instead. “Small amounts of money, invested over time, turn into large piles of cash that can change your life,” Berger writes in his book.

Do a money audit

You don’t necessarily have to give up things you enjoy to spend less and boost your savings rate. You can save without changing your lifestyle by doing what Berger calls a money audit.

Evaluate your monthly bills to decide whether there are any services you can live without. If so, cut them. If you don’t want to give up any services, look for ways to get them at a lower cost by switching providers or negotiating the terms of your service contract. “It’s unbelievable the amount of savings people generate by the way they’re dealing with their cell phones, the way they’re getting their Internet, making changes to their cable package, making changes to their gym membership,” Berger says.

Ask, “What if?”

It’s one thing to eliminate small indulgences to boost your savings. But Berger recommends asking yourself what if you cut major costs out of your life, such as your car. If your family has two, consider whether you could live with just one. Or perhaps you could get a cheaper car. Reducing or cutting that expense could add up to significant savings over time.

If you do have debt, don’t put off investing until you pay it off, Berger says. Make more than the minimum monthly payments on your debt, but make sure there’s enough room in your budget to save for retirement, too.

Where to stash your savings

For every expense you reduce or cut entirely, have that amount automatically transferred each month into savings. However, the key is to make sure that savings is being invested through the right type of account, Berger explains.

If your employer matches your contributions to a workplace retirement plan, that’s the first place you should be putting your retirement savings, Berger notes. That’s because that matching contribution is free money that will help your savings grow faster.

If you max out your 401(k) or other workplace retirement plan, then save more in an individual retirement account, such as a Roth IRA (which offers tax-free withdrawals in retirement), if you’re eligible, Berger says. If you have a high-deductible health plan, you should consider contributing the maximum to a health savings account. You can withdraw the money tax-free now or in retirement to cover qualified medical costs.

The key is to start now. The sooner you reduce spending to invest more, the sooner you’ll be able to retire. And retirement doesn’t have to mean that you don’t work at all. Achieving financial freedom means you can live off your savings and investments without the need to work, Berger says.

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She also is an award-winning journalist who has been writing about personal finance for more than 17 years. You can learn more about her at CameronHuddleston.com. Opinions are those of the author or the person interviewed.