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Once considered a pipe dream for most, early retirement now seems to be a trend. The movement has a growing number of blogs devoted to it and a name that, while catchy, illustrates what happens when you come up with the acronym first: FIRE, or “financially independent retire early.”
Recent research from the online broker TD Ameritrade found that, on average, millennials expect to retire when they are 56. That’s more than a decade earlier than what’s considered full retirement age by Social Security.
It’s a noble goal, but also a lofty one: If there’s one factor that can make or break your retirement plans, it’s the age at which you begin that coveted life stage. Here’s why.
The one-two punch of retiring early
The reason early retirement changes the game is twofold, says Cary Cates, a certified financial planner in Denton, Texas. “It reduces the time that you actually have to save money and receive compounded growth on that, and it increases the amount of time that the money has to last.”
The concept is fairly simple when you break it down: Let’s say you start saving at 25. If you retire at 56, you have 31 working years to save for retirement. (And that’s probably generous — the TD Ameritrade research found that respondents plan to start saving when they are 36, on average.) Assuming a life expectancy of 95, the money you save needs to last 39 years.
Compare that with someone who retires at 67 — that person would have 42 years to save, and would need that money to last 28 years.
What that means: The saver who retires earlier needs to save more money in a shorter time. How much more? Consider a 25-year-old who earns $40,000 per year. Let’s say she wants to plan for a life expectancy of 95, and expects to earn an average annual return of 6% on her investments, with 2% salary increases per year.
If she wanted to retire at age 56, she’d have to save 27% of income — $883 per month. Retiring at the standard age of 67 means saving a more reasonable 16% of income, or $533 a month.
What might surprise you: That 27% is actually quite low, thanks to this hypothetical saver’s young age. Someone who decides to embark on this early-retirement quest at age 35 would be in even more trouble, even if she already has quite a bit saved.
Using the same assumptions above, a 35-year-old who earns $60,000 and has $60,000 saved would still need to save 38% of income — $1,900 a month — to retire at age 56. That’s nearly twice what would be required if she planned to retire at the typical age of 67.
(NerdWallet’s retirement calculator produced the above numbers — plug in your own information to see how much you should be saving based on your expected retirement age and other factors.)
A lower standard of living helps make it possible
One thing that makes early retirement possible for those who aren’t scared away by these high savings rates: If you’re saving 30% or 40% of your income, you’re already accustomed to living on significantly less than you earn. That can make transitioning to a lower income in retirement more seamless.
“The biggest problem with retiring early is not necessarily that people don’t save enough — it’s that over time, as they earn more, they expand their standard of living,” Cates says. “Saving big chunks of money forces you to live on less, and that’s what can make [early retirement] feasible.”
Even so, it means a commitment to consistently live below your means so you can save a third or more of your salary.
Retirement accounts are designed for a later retirement age
One more factor in the decision to knock off early: Whether you can access the money you’ve saved without paying extra penalties or taxes.
Most retirement accounts levy a 10% penalty for distributions before age 59½. The major exception: Roth IRAs, which allow you to tap your contributions — but not investment earnings — at any time.
You may also be able to tap money in your 401(k) without penalty if you leave your job — what the IRS calls separating from service — in or after the year you turn 55, Cary says.
That rule applies only to current 401(k) plans, however — if you still have money in an old employer plan and you weren’t 55 or older when you left that employer, you have to meet the 59½ age barrier to avoid an early distribution penalty. That means early retirees may want to roll old 401(k)s into their current 401(k) before retiring.
And if this all sounds like a lot of rules to swim through on your way to Margaritaville? Find a financial advisor who can help you.
This article was written by NerdWallet and was originally published by Forbes.