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By Alliant Credit Union
Dreaming of an early retirement? If you’re already putting away a substantial amount of savings every month, you might be on your way there. That’s because you’re not only earning more on your money, you’re also spending less to maintain your lifestyle. That can have a big impact in retirement — the less you need to spend to live the life you want, the less you need to save (and, the earlier you can potentially retire!).
Let’s take a look at an example from Michael Kitces, a Certified Financial Planner and blogger (you can read the full examples here):
If Joe saves 15% of his income (and his income grows at 3% a year), he can save over $1.25 million by age 65, which should be able to maintain his lifestyle at a 4% safe withdrawal rate.
By comparison, if Sally — a more aggressive saver — saves 25% of her income (also growing at 3% a year), she will save nearly $2.1 million by age 65. Sally would have already reached Joe’s retirement account balance of $1.25 million by age 60, and could likely have retired at or before the age of 60. Since her savings rate is higher and she’s living on less, she wouldn’t need as much to retire in the first place.
Of course, not everyone is interested in saving 25% of their income, but the main point remains: Good savings habits not only help to build retirement savings more quickly, but can also reduce the need for a huge retirement fund in the first place, potentially enabling you to retire earlier. And who wouldn’t love to leave the workforce a little earlier?
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