How to Retire at 50: 8 Things to Consider
Today, the average American retires at around age 63. But what if you wanted to retire at 50 instead?
For some people, this type of early retirement is their top financial goal. Their dream is to work hard and sacrifice throughout their early years so they can live the rest of their lives on their own terms.
While it’s possible to push your retirement date up by 10-plus years, it’s bound to take more than living below your means throughout your 20s, 30s, and 40s. You’ll also have to maximize your biggest accumulation years, make savvy investment decisions, and catch a little luck along the way.
Table of Content:
- What type of retirement do you want?
- Your expected lifespan
- Your investment plan
- Maxing out your retirement accounts
- How will you finance the first 10 years?
- Your family medical history
- Having a retirement income strategy
1. What type of retirement do you want?
Everyone has different expectations for retirement. That’s why there’s no universal answer to the “how much do I need?” question.
One rule of thumb is you’ll need to have between 60% and 100% of your pre-retirement income available for every year of retirement. Where you fall in this spectrum depends on the type of retirement you envision. For example, if you plan on traveling around the world, you’ll draw closer to 100% of your former income. But if you’re envisioning a modest retirement lifestyle, you may only need 60%.
To get a ball-park figure of how much you’ll need, start by estimating your expected salary by age 50. Then, depending on the type of retirement you want, multiply that salary number by anywhere between 0.6 (60%) and 1.0 (100%) to get an idea of how much you’ll need to finance each year of your retirement.
2. Your expected lifespan
The average lifespan in the U.S. is 78.6 years. Why include this gloomy statistic? Because any effective retirement plan needs to consider how many years your money needs to last.
Using this statistic, if you retired at 50, your retirement funds would need to last 29 years. Now you can multiply your annual retirement allowance by 29 to get an estimate of how much you’ll need to accumulate in order to retire by 50.
Note: Talk to your doctor about your family history to get a better understanding of your expected lifespan.
3. Your investment plan
Retiring at 50 isn’t easy, mainly because you’ll have fewer years to accumulate assets. How you can make up for that loss of time varies.
If you’re fortunate enough to draw a large salary, you could afford to invest more modestly and still have enough wealth to retire by 50. Or, if you don’t have a high salary, you could chase higher returns with a more aggressive portfolio to help get you there. Just remember that aggressive portfolios are made up largely of stocks, which are volatile.
Either way, success is dependent on a solid plan and, depending on your investment strategy, some good fortune. Investment-wise, you could either go through a financial professional or manage your own portfolio. Keep in mind that financial professionals charge fees and/or commissions, but if your “retiring by 50” plan is heavily dependent on a savvy investment strategy, then it could be money well spent.
4. Maxing out your retirement accounts
Tax-advantaged retirement accounts like 401(k)s and IRAs have annual contribution limits. For people under 50, the 2020 limit for 401(k) contributions is $19,500 while IRAs are limited to $6,000. By maxing out one or all of your retirement accounts, you’ll have more tax-advantaged retirement money that can compound over the years.
However, finding $19,000 to contribute to your 401(k) every year takes more than cutting the cable cord. That’s especially true when you’re in your 20s, still climbing the professional ladder. In your 20s, live as far below your means as you can — hold off on lavish vacations, drive your beat-down car as long as it’ll run, and direct all of those funds toward the future. The sooner you can max out your retirement accounts, the better.
5. How will you finance the first 10 years?
Retirement accounts have a 10% penalty for withdrawals taken before you turn age 59 ½. Therefore, if you retire at 50, you’ll need to tap into other resources to finance those first 10 years.
Those “other” resources will have to come from traditional savings or by withdrawing from your brokerage accounts. That is, unless you’ve recently received a large inheritance. That would certainly come in handy.
Since there are no withdrawal dates for brokerage accounts, you could begin withdrawing money at 50 when you enter retirement. All withdrawals are subject to taxes, but only on the return portion of your investments.
6. Your family medical history
This point is tied to the life expectancy note mentioned earlier. Healthcare is one of the biggest expenses in retirement. If your family has a history of chronic illnesses, that could impact how much money you’ll need for retirement. Keep in mind that long-term care insurance can cushion the cost of nursing homes and other healthcare costs you could incur in retirement.
7. Having a retirement income strategy
Just because you retire doesn’t mean your money has to stop working. As you get closer to 50, come up with a plan to stretch your money through retirement.
A common strategy is to ladder with bonds, Roth IRAs, or certificates of deposit (CDs). Other retirees work part-time jobs in retirement to keep money coming in. These strategies, when executed properly, can maximize your money. Again, this is where a financial professional can help.
Pros of Retiring at Age 50:
- Time to Enjoy Life
Many people in their 50s have days full of work deadlines, family commitments, and household duties. “Freedom is typically not an option for most,” says Chris Keller, partner at Kingman Financial Group in San Antonio, Texas.
“If you can afford to retire early, the rewards will be plentiful if you don’t put too much stress on your budget.” You will have extra hours to pursue a hobby, help with a charity, attend your children’s events or take on house projects.
2. No Commute
If you regularly drove or took public transportation to work, retiring early allows you to avoid everyday traffic. “If you are no longer commuting, then you will potentially be saving on gas money and the expenses of wear and tear on your vehicle,” says Chris Berkel, founder of AXIS Financial in Edmond, Oklahoma. Your current vehicle might last longer if it gets less use during your retirement years.
3. A Chance to Reinvent Yourself
Finishing one career means you are able to put your energy toward something you find interesting or rewarding. “Many individuals may want to retire early so they can pursue another career, business or fulfill a lifelong dream,” Berkel says. At the age of 50, you may still have the energy to pursue a meaningful goal. You might decide to allocate a portion of your savings toward this new pursuit.
5. A Healthier Lifestyle
Rather than grabbing meals on the go or shorting yourself on sleep, early retirement can give you the chance to focus on health. You might find time to start walking, join a nearby gym, or participate in a local sports league. The focus on nutrition, sufficient sleep, and exercise could improve your health and result in lower medical costs.
6. Lower Stress Levels
If you have a rocky relationship with your boss or often sit through grueling meetings, early retirement can seem like a breath of fresh air. “Working in an office brings various forms of stress into your life,” Keller says. “By retiring early, much of that stress can be avoided.”
Cons of Retiring at Age 50:
- Difficulties Accessing Retirement Accounts
Many retirement plans are designed for individuals to begin making withdrawals later in life. “Traditional IRAs and 401(k)s may have penalties to access funds prior to age 59 1/2,” says Nicole Strbich, director of financial planning for Buckingham Advisors in Dayton, Ohio. You’ll want to have other sources of income or accounts established to draw on during your initial years of retirement.
2. Expenses Could Catch Up With You
If you frequently travel, purchase another home, or go out to eat more often in retirement, your monthly expenses could increase quickly. In addition, it can be easy to overlook inflation rates.
“Inflation today is at an all-time low, but don’t expect it to stay that way,” Keller says. If living expenses rise and your monthly budget can’t keep up, you may have to downgrade your lifestyle to avoid going into debt.
3. Feelings of Boredom
While having free time may initially be exhilarating, the extra hours could become monotonous. If your acquaintances and family members are involved in other activities such as work and school, you might end up with more time alone than you anticipated. Loneliness can set in if you don’t set up a schedule or fill your days with activities you’re passionate about.
4. Expensive Health Insurance
After leaving the workforce, you will need to set up your own health coverage. “Usually a person retires at age 65 from their employer and rolls into Medicare, but now we have a 15-year gap that must be accounted for,” says Randa Hoffman, a financial planner and owner of Radiant Wealth Planning in Newport Beach, California.
A portion of your monthly budget may need to be dedicated to health insurance premiums until you reach age 65 and qualify for Medicare.
5. Having to Return to Work
If your savings can’t keep up with your retirement lifestyle or if unexpected expenses arise, you may find yourself looking for another job.
“Getting back into a work routine is tough and technology can change things drastically,” Keller says. You may need to take a refresher course or learn new skills before re-entering the workforce.
Retiring early isn’t easy. You’re trying to build more wealth in less time, so naturally that’s challenging. It involves making financial sacrifices in your 20s, 30s, and 40s, then using those savings wisely to build wealth.
Consulting with a financial professional can help you create a plan to proceed wisely and confidently during your younger years so you can reap the benefits when you turn 50.
- Step 1: Start Saving EARLY!
- Step 2: Save More than Everyone Else.
- Invest and Invest Aggressively.
- Step 4: Maximize Your Retirement Savings.
- Step 5: Set up a Roth Conversion “Ladder”
- Live Beneath Your Means.
- Step 7: Stay Out of Debt.
How to Retire at 50: 7 Things to Consider