How Millennials and Gen Z Can Plan For Their Early Retirement Dreams
Voluntary early retirement is a goal many people are dreaming of, especially in the wake of the Covid-19 pandemic. The pandemic provided millions of workers with more time to evaluate their priorities, their goals, and indeed, their values. And many people – especially young workers – realized they don’t want to work their lives away.
But early retirement is a lofty goal and is not one that can be achieved on a whim. Early retirement takes decades of planning and strategizing. However, early retirement is an attainable goal for those who plan well, as is evident from the Financial Independence, Retire Early (FIRE) movement.
Thousands of young people are already subscribing to online blogs, podcasts, and other resources to learn how they, too, can become a part of the FIRE movement to achieve financial independence and retire early.
Why Millennials and Gen Z Want to Achieve Early Retirement
New research from Northwestern Mutual reveals that millennials and Gen Z workers expect to retire early. On average, both millennials and Gen Z plan to retire before age 60, which is much earlier than the age baby boomers say they expect to retire.
Despite the well-documented financial struggles millennials have faced over the past two decades, this generation and the generation after seem to be feeling optimistic about their ability to retire early. According to the study, millennials and Gen Z cited four main reasons for wanting to retire early:
They want to have more time to spend with their loved ones
They want to have more time to focus on priorities and hobbies outside of work
They believe that realizing their personal mission is more important than saving as much as possible
Their work situation has changed (i.e., they’ve been laid off)
Whatever their individual reasons for wanting to achieve early retirement, it’s clear that millennials and Gen Z have different priorities than the generations before them. Many younger workers have expressed their willingness to live on a lower income to be able to retire early, rather than work their lives away to save for a more comfortable future – a future they may not believe exists.
To achieve their dreams of early retirement, millennials and Gen Z will need to start planning now. There are many obstacles that may make it difficult for them to achieve early retirement, especially if they’re not aware of those obstacles.
Challenges Younger Generations Will Face in Early Retirement
Early retirement may sound like a dream, but there are plenty of headaches to reckon with before an individual can confidently make the decision to retire early. Although these obstacles can be overcome, they’re not always easily surmounted. Three of the biggest challenges prospective early retirees face are:
The cost of health insurance
Early retirement income sources
Longer life expectancy planning
The Cost of Health Insurance
One of the biggest obstacles to early retirement is health insurance. Most people won’t be able to enroll in Medicare benefits until just before their 65th birthday, many years after younger generations say they would like to retire. Without an employer-sponsored health insurance plan, some families simply won’t be able to afford the cost of private health insurance.
In 2020, private health insurance premiums cost families an average of $1,152 per month (not including expenses for deductibles, coinsurance, or out-of-pocket maximums). Those costs are only increasing, so any early retirement plan must account for tens of thousands of dollars per year in private health insurance premiums at a minimum.
Early Retirement Income Sources
Additionally, prospective early retirees must determine where their retirement income will come from. Much like enrolling for Medicare, early retirees won’t be able to access Social Security in retirement just because they’re “retired.” They’ll need to wait until at least age 62 to begin receiving Social Security benefits, and most retirees may want to wait until they reach full retirement age or beyond to receive the full amount of their benefits.
Additionally, if millennials and Gen Z expect to retire early with their 401(k) or IRA retirement savings, they may be disappointed. Retirement savings in these tax-advantaged accounts are unavailable for withdrawal until age 59½ to avoid paying steep penalties to the IRS. Individuals who retire earlier will have to live off the income from taxable investment or savings accounts in the meantime.
There are a few exceptions to this rule. For example, one 401(k) provision allows workers to access funds from an employer-sponsored 401(k) plan without penalty if they retire from that employer at age 55 or above. The funds must remain in the original 401(k) and they cannot access funds from any other retirement account, such as an IRA, without paying the penalty.
Longer Life Expectancy Planning
Life expectancy is generally increasing in the US, although it decreased in 2020 due to the pandemic. If life expectancy continues to increase, retirees must be prepared to produce income for many more years of retirement than previous generations. Early retirement aggravates this problem by further extending the years for which retirement income is needed.
Longer life expectancies may also result in a greater need for long-term care for many people. Long-term care (LTC) costs are not covered by Medicare. Therefore, retirees will need to prepare to pay for expensive LTC costs out of pocket or purchase an LTC insurance policy.
How Millennials and Gen Z Plan to Achieve Early Retirement
Millennials and Gen Z aren’t optimistic about receiving Social Security benefits. And with stagnating wages, they know they may not be able to fund their retirement with 401(k) and IRA contributions alone. They’re probably not wrong. With rising inflation and the unpredictability of the markets, young investors are realizing they have to think outside the box to produce passive income for retirement.
Thanks to the increasing popularity of the FIRE movement, younger generations are realizing there are better ways to save for the retirement of their dreams – including early retirement. Younger generations are having great success in investing in alternative assets like real estate to increase their return potential and earn passive income on a consistent basis – even before they’ve decided to retire.
Work Toward Early Retirement with a Self-Directed IRA
If prospective early retirees are already finding success investing in real estate and other alternative assets, they may now be looking for ways to do so in a tax-advantaged retirement account. 401(k)s and regular IRAs restrict investors to assets such as stocks, bonds, mutual funds, and ETFs, which can feel restrictive to investors who are already experiencing success with alternative assets.
Fortunately, a solution exists for investors who want to invest in assets outside of Wall Street and still enjoy the advantages of a tax-deferred or tax-exempt retirement account. The answer is a self-directed IRA.
With a self-directed IRA, you can invest in over 30 different asset classes, including real estate, equipment leasing, peer-to-peer lending, and many more without sacrificing tax advantages. These assets offer the potential for higher returns, positive cash flow, and leveraged investment opportunities.
At Chicago Trust Administration Services, we administer self-directed IRAs for our clients to ensure their transactions in alternative assets are legal and compliant with IRS regulations. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.