Can You Retire Early If You Miss Out on Several Years of Savings?

Many people have the goal of retiring early. And if you make an effort to consistently contribute to your savings, it may be an attainable goal for you.

But what if you’ve faced some recent setbacks that forced you to hit pause on your retirement plan contributions? A lot of people have struggled to keep up with higher living costs this year, spurred by inflation. And so you may have needed to stop your IRA or 401(k) plan contributions to keep paying your rent or put food on the table.

Meanwhile, a lot of people paused retirement plan contributions during the pandemic due to being laid off or incurring extra expenses in 2020 and 2021. Say you needed to spend an extra $10,000 on childcare during that time so you could continue working while schools were closed. That’s money that may have otherwise gone into your retirement savings but didn’t.

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If you’re worried that a few years of missed savings will hurt your chances of retiring early, that’s understandable. But you should also know that you’re not necessarily doomed to lose out on that opportunity, either.

You may have time to catch up

Let’s say you took a couple of years off from funding your IRA or 401(k), and at this point, you’re 35 years old with a balance of $50,000. Let’s also assume you won’t be able to fund your savings for another year, since we’re starting off 2023 with still-high living costs.

You may have the goal of retiring at age 62, which is the earliest age to sign up for Social Security and a relatively young age to depart the workforce. If you then make a point to pump $500 a month into your retirement account between ages 36 and 62, you’ll end up with about $850,000 if your IRA or 401(k) delivers an average annual 8% return, which is a bit below the stock market’s average.

Now if you withdraw from an $850,000 nest egg at a rate of 3.5% a year, that gives you about $30,000 in annual income for an early retirement. Combine that with a monthly Social Security benefit (albeit a reduced one if you sign up before your full retirement age), and you may find that you’re able to exit the workforce early if you’re willing to live a relatively frugal lifestyle.

(If you’re wondering about that 3.5% annual withdrawal rate, you should know there are different rates you can play around with. Financial experts have long recommended a 4% withdrawal rate, but if you’re retiring early, it’s wise to be more conservative, since you might need your savings to last longer.)

Of course, this is just one example. The point, however, is that you can easily recover from a few years of missed IRA or 401(k) contributions. So if that’s the scenario you’re looking at, don’t give up on that goal. Just push yourself to do your best to catch up once your circumstances change for the better.

Early retirement can mean different things

For some people, retiring early means not working at all. But that’s not necessarily a route you need to take — especially if you have financial concerns.

You might, for example, decide to leave your career in your late 50s or early 60s but spend a few years doing something more fun or meaningful that pays a lot less. Or you might choose to go from a full-time work schedule to part-time.

The more flexible you are with your interpretation of an early retirement, the easier it might be to meet that goal. This holds true whether you manage to fund your IRA or 401(k) every single year of your career, or whether you’re forced to take breaks when financial circumstances warrant it.

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