Is Early Retirement Possible for Middle Class Income Earners?

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Is Early Retirement Possible for Middle Class Income Earners?
It can seem as if most of what you do is to just get by, and pay the bills. Early retirement can seem like a pipe dream if you’re a middle class income earner. How would it even be possible to save for such a huge goal as early retirement? In truth, it would be…

It can seem as if most of what you do is to just get by, and pay the bills. Early retirement can seem like a pipe dream if you’re a middle class income earner.

How would it even be possible to save for such a huge goal as early retirement? In truth, it would be about same as it would be if you had a much higher income.

Here’s why.

Is Early Retirement Possible for Middle Class Income Earners?

Is Early Retirement Just for the Rich?

This can often seem to be the case, especially for middle class income earners. After all, high income earners should be in a better position to save and invest a higher percentage of their income, making early retirement both more possible, and maybe even not so far off into the future.

But while all of that is true, high income earners often find it difficult to save the desired higher percentages of their income because of lifestyle inflation. That’s the process by which expenses tend to rise with a higher income. There is often strong social pressure to do just that, since high earners often run with high spending social circles. In some cases, high income people may have less control over their income than middle class income earners do.

It all comes down to percentages anyway. If a high income person can save 20% of their income for early retirement, you can do the same on a more modest income. Higher percentages may even be easier to reach, since middle income people are in lower income tax brackets. More on this topic in a bit.

The Built-in Advantage of Middle Class Income Earners

There’s one inherent advantage that middle class income earners have over the high income crowd: the need for less income. While a high income person may “need” $100,000+ per year to early retire, a middle income person may be able to do it on $40,000 – or less.

As a middle class person, you don’t have a perceived need for a McMansion, a late model, high-end car, or a fat travel budget. You may be looking for early retirement primarily for the financial freedom it will provide, more so than a rich lifestyle.

One other advantage you have as a middle class income earner is that you’re probably accustomed to finding less expensive ways to live your life. Over time that becomes second nature. High income earners don’t always adopt that mindset because their high incomes make it less necessary.

In the high income realm, convenience is often a priority. They are willing to spend more money if it means more free time and less stress. While that almost certain serves them well during their working years, it can be a disadvantage in early retirement, when income is no longer so generous.

In a real way, the frugality that middle class income people live with everyday is outstanding training for early retirement.

You Will Have to Save a Higher Percentage of Your Income

For anyone who wants to achieve early retirement, it’s absolutely necessary to save an above average percentage of your income for that purpose. This is a true statement regardless of your income.

For people who plan to retire in their 60’s, saving 10% to 15% of their income each year may be sufficient. But if you want to retire at, say 50, you’ll have to save at a much higher level.

20% will probably be the lowest you can save and hope to retire even a few years early. But if you hope to do so in 20 or 25 years, you will probably need to save 25% to 30% of your pay, or even more.

This may seem to put more pressure on middle income savers than it will on high income earners – after all, they’ll have more money to live on, even if the saving percentage is the same as the one you’re using. But it’s all relative, so it works just the same.

This high level of savings actually accomplishes two very necessary goals in the cause of preparing for early retirement:

  1. It enables you to save the money that you need to make early retirement possible, and
  2. It forces you to learn to live on less money, which will mean that you will need even less income and savings when the time comes.

For those two reasons, saving a high percentage of your income should always be embraced as a necessary step toward the bigger picture goal of early retirement.

You Will Have to Invest More Aggressively

If you plan to retire in say 20 or 25 years, you won’t have the luxury of investing heavily in safe investments like certificates of deposit, money market funds, US Treasury securities, or even bonds. The returns on those investments are low by historic standards, and not nearly sufficient to enable you to reach your retirement goals.

You’ll have to invest the largest share of your investment portfolio in higher risk, higher reward assets. This will include growth stocks, real estate or real estate investment trusts (REITs), or even peer-to-peer lending. All have more risk than interest bearing investments, but also have much greater potential to turn the double-digit returns you will need to earn on your portfolio if you want to retire early.

In addition, it may not serve your best interests to do all of your investing through tax-sheltered retirement plans, such as a Roth IRA. Even though such plans provide very generous tax benefits, it’s also important that you understand the difference between early retirement and retirement at traditional retirement age.

Early retirement means that you will almost certainly retire before you turn 59½. If so, you will have to leave your investments in your retirement accounts until you reach the IRS retirement age. Withdrawing your funds early will mean having to pay ordinary income tax, plus a 10% early withdrawal penalty tax. All of the tax benefits you enjoyed while building up the accounts will create a potential tax nightmare on early withdrawal.

For that reason, you will need to save enough money in taxable investment accounts to cover your living expenses until your reach the age of  59½ and can begin making retirement fund withdrawals without penalty. Taxable investment accounts may not have any tax benefits while you are building them up, but there will be no tax liability created when you begin making early withdrawals.

Remember, the goal of your taxable investments is to bridge the gap from the time you retire until you are able to begin making penalty-free withdrawals from your retirement accounts, or until you begin receiving income from pension plans, social security, or other retirement income.

You May Not Need to Replace All of Your Current Income

In the ideal scenario, you will retire early to a 100% work-free lifestyle. But if it turns out that it won’t be possible, you still have a couple of options.

One is a radically less expensive lifestyle. If your kids are grown and gone by the time you retire, you may not need a house. You also won’t need to save for their college education. And once you retire, you probably can get by with a very inexpensive used car, rather than a much more costly late model version.

The point is, living on a lot less money than you do now may be more possible once you actually reach retirement.

If that won’t be enough, or if it isn’t desirable, you can always opt to for the early semi-retirement route. That’s where you either retire from full-time work, but continue to work in your current capacity on a part-time basis, or you start a whole new career in a different direction.

This is hardly a new idea. Many people prepare for early retirement specifically to enable them to start a new career, perhaps in an entirely new field. If it’s work that you like doing, it won’t feel like work. As well, the fact that much of your income will be coming from your investments means that you won’t be as financially dependent on the new career as you are in your current one. The reduced financial pressure could make the new career a whole lot less stressful. Think in terms of the saying, half-a-loaf is better than none.

So yes, early retirement is possible for middle income earners. You just have to know what the best strategies are, and you can make it your reality.

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About Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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