A growing percentage of Americans believe they'll have to work well into their 60's and beyond in order to save up enough for retirement. In fact, Northwestern Mutual's 2018 Planning & Progress Study found that 73 percent of those planning to work past traditional retirement age are doing so because they don't have enough saved up to retire comfortably.
But on the other side of the spectrum, there's a cohort of people striving to retire early.
To find out where you fall, personal finance blogger Zach of Four Pillar Freedom created a simple chart that breaks down how close you are to financial independence, or early retirement, based on how much you're able to save and invest each month.
The chart assumes a few things:
- You're starting with absolutely nothing in savings
- A 7 percent annual growth rate
- Your lifestyle will stay in the same in retirement
So how close are you to financial independence? Check it out:
Zach defines the amount you'll need for financial independence as 25 times your current annual income, which typically falls in line with the "4 percent rule" used by many early retirees. The guideline states that, if you can safely withdraw 4 percent a year from your retirement savings portfolio, you have enough in the bank to quit your job.
However, while it's a useful tool to see if you're on track to kick back early, it's important to keep in mind that not everyone's retirement goals are the same. Some experts recommend using a lower withdrawal rate to be safe.
Another way to figure out how close you are to financial freedom is to calculate your savings rate, which is the percentage of your disposable income that you put away for the future.
Your savings rate can be determined using a simple equation: Divide the amount you saved last year by your gross income. That means if you earned a pre-tax salary of $50,000 and were able to contribute $5,000 to a retirement account, your savings rate is 0.1, or 10 percent.
Once you figure out your savings rate, you can get a sense of how close you are to financial independence. This varies according to your personal goals but experts typically recommend having $1 million set aside in order to retire in your 60's, although it's worth noting that even $1 million doesn't stretch as far as it used to.
If you're on track and want to retire even earlier, flipping the 4 percent rule can help you figure out how big your portfolio needs to be, or what's called your "magic number." Simply divide your annual spending by 0.04, or multiple it by 25, to get your target.
And if you're vying to join the early retirees' club but aren't on track to make it happen yet, take some inspiration from people who have already done it:
- Self-made millionaire shares the 3 steps he took to retire in his 40s
- How one couple saved more than $1 million in 10 years to retire in their 30s
- How one couple saved $1 million in 4 years to retire by age 43
This is an updated version of a previously published article.
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