How much money you really need to save

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Status: 11.09.2024, 11:45 a.m.

From: Raphael Strecker

Almost no one would turn down the following offer: retire at 50 and use your free time as you wish. But how much money is needed for that?

Dortmund – For many employees, this is certainly a dream: instead of working until the age of 67, they can give up their careers at the age of 50 to pursue leisure time and hobbies. If you want to be considered rich in retirement, you need a certain income – but if you want to retire at the age of 50, you have to consider a lot more.

Retirement at 50: How much money you really need to save

A look at the so-called FIRE movement provides insight into the possibilities and challenges of early retirement. FIRE stands for “Ffinancially IIndependence, Rrelax Early” (financial independence, early retirement).

As ING explains, the movement, which originated in the USA, is also becoming increasingly popular in Germany. The basic principle: work hard when you are young, save a lot and invest wisely in order to be financially independent well before the statutory retirement age.

Retirement at 50: Can employees retire so early?

The road to financial independence at 50 is definitely rocky and requires a lot of discipline in addition to an above-average income. Several points must be considered in order to retire so early:

• High savings rate: FIRE followers often save 50% or more of their income.
• Long-term planning: The savings must last for several decades.
• Inflation consideration: The purchasing power of savings must be maintained.
• Investment risks: The money must be invested with a view to achieving returns.
• Insurance: Contributions to health and pension insurance must be taken into account.

Retirement at 50: Difficult to achieve for average workers

Let’s consider the fictitious case of Anna, a 35-year-old software developer. Anna currently earns an above-average net salary of 5,000 euros per month and wants to retire at 50.

You have already saved 150,000 euros in a broadly diversified stock portfolio. Anna estimates that she will need 3,500 euros per month in retirement. We make the following assumptions for the calculation:

• Annual inflation: 2.5 percent
• Expected return of the portfolio after taxes and costs: 5 percent
• Life expectancy: 90 years

Early retirement: Calculation example illustrates financial outlay for employees

In order for Anna to have 3,500 euros per month available until she is 90, she will need a lot of money at the age of 50. Taking inflation and the expected return into account, the capital required is around 1.45 million euros.

In order to increase her savings from 150,000 euros to 1.45 million euros in 15 years, Anna needs to save around 3,800 euros per month with an unexpected return of 5 percent. With a net income of 5,000 euros, she would only have 1,200 euros left as a monthly budget (more financial topics at RUHR24).

Even with an exceptional net income of 5,000 euros per month, it would be almost impossible to save almost 76 percent of it. A look at the average salary in Germany shows that some sectors are better for pensions.

Retirement at 50: An enormous challenge even for high earners

Alternatively, Anna could adjust her retirement plans and work until she is 55. The required monthly savings rate would then be reduced to around 2,200 euros.

If Anna were to settle for less money per month in retirement, the savings rate could be reduced even further. Either way, however, the example illustrates how challenging the goal of “retirement at 50” can be, even for high earners.