The traditional version of retirement may conjure up images of gray-haired couples soaking up the sun on rocking chairs or playing Backgammon in the evenings. But retirement today looks very different, especially for those who plan on leaving work behind earlier than the usual retirement age.

Retirement planning doesn’t look like it used to, either. Pensions have all but gone by the wayside, meaning your future income needs primarily rest in your own hands. So, what does it take to achieve a modern-day retirement? Is it even achievable for people in their 30s and 40s? Let’s take a look.

Why Retirement Looks Different Today

Social Security (a government-sponsored retirement income source for millions of Americans) was invented in 1934. At the time, individuals could begin collecting their Social Security payments at age 65. At the time those who made it to age 65 were expected to enjoy around 12 years in retirement. Fast forward to today, and life expectancies have improved—meaning someone who turned 65 in 2023 can expect to live another 19.2 years on average.   

Speaking of Social Security, it’s important to remember that this is a guaranteed lifetime income source that will be adjusted for inflation—making it a reliable piece of your retirement income puzzle. The drawback? It’s not going to be enough to cover all your financial obligations in retirement, and in fact was never meant to, as it was originally intended as only a supplement to income. While it’ll depend on a number of factors, the average Social Security retirement benefit check was $1,907 in early 2024.

Not only are people today spending longer in retirement, but with the decline in pension plans and lack of guaranteed income support, they are required to address the savings gap on their own. You may choose to do this by trying out a less stressful “encore career” in early retirement, investing aggressively in your younger years, and maxing out contributions to your tax-advantaged retirement accounts (like a 401(k), IRA, and Roth IRA).

Why Your Younger Years Are Critical for Wealth-Building

If you’re a relatively high earner hitting the mid-stride of your career, you may feel invincible—you’re in your 30s or early 40s, enjoying a well-paying job, and retirement seems doable (not to mention far off into the future). 

The reality is, these could be your peak earning years—especially if you’re in a fast-evolving field or plan on pivoting to a slower-paced career in your 50s and 60s. This is your time to invest and save aggressively, especially if you plan on retiring earlier than the typical retirement age. 

Even if you are planning for a more traditional retirement, it’s likely your lifestyle will elevate over time, and you’ll need to set aside enough more now to help ensure you maintain your standards of living well into retirement—as well as address unexpected expenses like long-term care, medical emergencies, or home renovations.

The Power of Compounding Interest

The earlier you start saving, the more power you’re giving your contributions to compound over time. Time is your most valuable tool as an investor and someone preparing for retirement.

For example, if you start maxing out your 401k at age 30 ($23,500 annually) and continue until age 55, your money has 25 years to grow and compound. Assuming an average 6% annual return, your account would reach $1,289,755. Then, if you stop contributing at age 55, but wait to withdraw until age 65, your account grows further to $2,309,754.

Now, consider starting at age 40 instead (due to other financial priorities like raising kids or paying off debt). By maxing out your 401k for 15 years, your contributions at age 55 would total $546,892—$742,863 less than starting at 30. At age 65, your funds would grow to $979,400, which is $1,330,354 less than in the earlier scenario!

We’re not denying the difficulties in prioritizing your future retirement needs while caring for your more immediate obligations. Rather, you may find it helpful to speak with a professional who can help you strike the right balance and take advantage of saving and investing during your potential peak earning years.

A Warning About Lifestyle Creep

One way we help clients address both their immediate financial obligations and long-term goals is by educating them on the risks associated with lifestyle creep. 

If you’re not familiar with the term, allow us to paint you a picture:

You’re advancing in your career and gradually earning more with each new promotion. As your paycheck grows larger, you start to splurge on more of the “finer” things in life, like a larger home, a shiny new car, eating out every night, and other luxuries. At the same time, you neglect to increase contributions to your retirement savings and investments or pay down debt faster.

You’re experiencing lifestyle creep—and it can be detrimental to your long-term financial health when left unchecked.

Earning more is a great accomplishment, but as someone who wants to potentially retire early, you should be prioritizing your savings and investments, overspending, and splurging, especially as you earn more over time.

Want to Make It to Retirement? 6 Priorities to Focus on Right Now

Now, if you’re looking for a few high-priority action items to focus on in the coming years, here’s what we believe should be at the top of your to-do list:

1. Maximize contributions to your retirement accounts: The majority of your retirement income very well may come from your retirement accounts, including a 401(k), IRA, and Roth accounts. If your employer matches a certain amount or percentage of your contributions, that’s free money you should never leave on the table.
2. Pay down high-interest debt: Consumer debt and other high-interest debt (credit cards, personal loans, payday loans, etc.) can snowball out of control quickly. The sooner you’re able to pay them down, the sooner you can free up more cash to put towards saving and investing.
3. Create an emergency fund: If you don’t already have one, an emergency fund is an immensely important component of any family’s financial life. As a general rule of thumb, your emergency fund should be able to cover between three and six months’ worth of expenses. 
4. Invest for growth: We believe in investing for the long-term, as opposed to trying to beat the markets (which can rack up fees and expose investors to more risk than necessary). 
5. Live below your means: Track your money coming in and going out each month, and prioritize your financial obligations like saving, investing, and paying down debt.
6. Protect your finances: Protecting your financial life is just as important as growing it. If you don’t already have insurance policies in place, look into what policies make the most sense for you and your family. These might include life insurance, disability insurance (which may be offered through your employer), and liability insurance.

Plan for the Retirement of Your Dreams (Even if it’s Decades Away)

Your retirement readiness won’t depend on one big momentous occasion. Rather, it’s going to require you to develop and stick to consistent good money habits—spending less than you earn, prioritizing your savings and investments first, starting your savings journey early, and so on.

If you’d like to speak to a financial planner about your plans for retirement, we encourage you to reach out to our team today. We’re more than happy to talk through your current concerns and share more about how we may be able to help.

Sources:

1. https://www.ssa.gov/oact/TR/2024/lr5a4.html
2. https://faq.ssa.gov/en-us/Topic/article/KA-01903

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Vancouver, WA works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Vancouver, WA office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.