Retiring at 65 seems like a life sentence these days. No one wants to work that long, and millions of people aren’t—they retire early, some even retire at 50. But, how?
Cutting off 15 years from your earnings can have a drastic impact on your retirement savings.
While most of your savings should take place in your younger years to take advantage of compound earnings, 15 years can mean a lot less money saved for retirement.
But it can be done. Here are the five steps you need to take to retire at 50.
If you’ve decided you’re committed to retiring at 50, here are the five simple steps to follow to achieve your goals.
- Determine your goals
- Save early and save often
- Invest aggressively
- Spend much less than you earn
- Keep your eye on the prize
Before you can think about retiring at 50, you must determine your goals. What’s your vision for retirement?
Ask yourself the following:
- How will you live? Will your lifestyle be similar to how you live now or drastically different? Will you move, travel, or stay put? The answers to these questions will determine how much you need to retire early.
- How much money will you need each year? Look at your financial situation now. Will it be different when you retire? Will you have fewer bills? Think of your mortgage, credit card debt, car payments, and any other fixed debt payments you have. If they aren’t paid off before you retire, it will increase the amount of money you need monthly.
- Will you work? This is a big one. Yes, you’re focused on retiring, but that doesn’t mean you can’t work. Some people retire from the job they have to work and start something they want to work. It may not make you nearly as much money, but it makes you happy, and during retirement, any income is good.
The earlier you save for retirement, the more money you’ll have. That’s the magic of compound earnings. Being able to front-load your investments and starting early will have a massive impact on the growth trajectory of your assets.
When you save early, you give your money more time to grow. As your money grows, your earnings grow too.
The earlier you start saving, the less money you have to contribute at one time, but the more money you’ll have to reach your goals.
You’d have $541,000 saved by the time you’re 50 if you make $100,000 a year and begin saving 8% of your income for retirement at age 25, compounding at an annual rate of 7%.
When you save the same amount starting at age 35, you will have just $215,000. That’s a difference of $326,000 while only having contributed $80,000 more.
When we say you need to invest, we’re not talking about savings accounts and CDs. To make your money grow, you must invest aggressively in stocks and some bonds for diversification.
The stock market gives an annual average return of 7% to 9%, which is enough to help you reach your goal of retiring at 50, assuming you invest early.
If you invest young enough, you can even increase your annual returns by choosing more aggressive, aka risky stocks, since you have more time to make up for a loss should one occur.
As you near 50, though, you’ll want to taper back on your aggressiveness to avoid the risk of a total loss right before you plan to retire.
A critical factor in retiring early is living well below your means. Don’t let your expenses stack up to your income. Only spend what’s necessary and invest the rest. Remember, you’re doing this to invest in your future, so you don’t have to work anymore, or if you do, you can do something you love.
If you’re married and both work, consider living off one income and banking the other income. If you’re single or only one partner works, keep your expenses low enough so you can invest a large percentage of your income.
Keep your eye on the prize, though. Create a vision board, surround yourself with like-minded people, and get your family on board with your desire to retire at 50, so making it a reality is easier than you think.
Don’t be afraid to revisit your plans frequently. If something happens, that causes you to adjust your strategy, that’s perfectly normal. Unexpected expenses, additional children, an emergency, or unexpected inheritance can impact your timeline for retiring.
If you retire early, possibly at 50, how much money would you need? Unfortunately, there’s no magic answer, but there are a few calculations you can use and some factors to consider.
First, think about how much you’ll spend in retirement. Will you live the same lifestyle you’re living now or something different? Will you need more or less than you spend now?
The average couple needs 70% – 80% of their current earnings annually during retirement. Figure out that number and see how it feels. Is it enough for you to live the way you want in retirement?
Once you know that number, think about how you’ll supplement your retirement income. Will you work doing something you love or start a business? Will you not work at all and rely 100% on retirement funds and eventually government pensions??
If you’ll rely on government pensions, you won’t be able to access it at the age of 50. But that means you’ll need even more money during retirement, so plan wisely around this extra complication
Knowing exactly how much you need to retire would make life a lot easier, right? Many people wonder can you retire at 50 with $300K?
It’s certainly possible, but only if you live a frugal lifestyle and have other money to supplement your retirement income. Let’s say, for example you live another 25 years after retirement. $300K only gives you $12,000 a year to live. If you live longer, you’d have even less money per year to live.
But, if you have an annuity, pension, or another passive income stream to supplement your $300K savings, you may get by, but again, on a relatively frugal lifestyle.
Is it enough for you? It might be, but make sure you go through the steps to determine how to retire at 50 to make sure it’s enough for you.
Unless you require a chartered yacht somewhere in the Caribbean, retiring with $2 million might provide for an un-luxurious but manageable retirement. The 4% rule states we can safely spend 80 thousand dollars every year without touching the principal.
Most financial professionals recommend budgeting around 70-80% of one’s pre-retirement income to prevent living too comfortably off one’s savings when starting.
Take a step back and think through how much you need to spend each year. Adding some additional buffer can lead to a lot less stress further down the line.
Alternatively, planning for too many expenses can leave you with a lot of excess funds. Having too much money at the end of your life allows for larger inheritances to be passed on, so plan according to your situation.
The police aren’t going to come knocking on your door because you decided to retire early. There is no law requiring you to work until a certain age. The only genuine concern when retiring early is will you run out of money? When you choose to retire is a personal choice, left entirely up to you.
Generally, professionals recommend having more money saved the earlier you retire. That is to hedge against fluctuating markets and inflation. Increasing your total amount saved often allows you to have a lower withdrawal rate as well.
That means more of your investments can continue growing while you take less of the profits each year.
Even with the best laid out plans, retiring at 50 can feel challenging. Here are some ways to make it a little easier on you.
You’ve probably figured out by now, the best way to retire early is to increase how much you save. That sounds easier said than done, though.
Here are a few simple ways to improve what you save.
- Stay out of debt – Don’t use credit cards as an extension of your income. If you can’t afford to pay cash for something, don’t buy it. Live by those principles, and you’ll stay debt-free, and it will be easier to reach your retirement goals.
- Create a budget – A budget tells you where you can and can’t spend money. Keep a budget and work saving for retirement into it. With savings as a line item on your budget, you’re more likely to do it regularly, getting you closer to retiring early. Consider using a budgeting app if you don’t like pen and paper.
- Cut back on expenses -As you look at your budget, find areas you can cut back. You may find that you spend more money than you realize. Eating out, shopping sprees, entertainment, and vacations are common areas of overspending. Track your spending and see where you can cut back so you can increase your savings.
Create a plan before you retire so you don’t enter retirement without knowing what you can and can’t spend. If you retire early, you’ll have to continue to be frugal, possibly even more frugal than when you were making money.
If you can, pay off your house before you retire, so you don’t have mortgage expenses to consider. If the property taxes where you live are high, consider moving to an area with lower taxes to save more money.
Also, plan your retirement adventures carefully. This isn’t the time to be carefree with your spending. Every purchase and expenditure should be carefully planned.
Retiring early doesn’t mean you can’t work at all. If there’s a business you wanted to pursue or a job you’ve always wanted but knew it wouldn’t pay the bills, now is a great time to pursue it.
If you retired because you didn’t want the stress of your high-paying job any longer, you could supplement your retirement income with money from a lower-paying job, but one you enjoy.
You could even start small side gigs, making a little extra money on the side for you to spend or even put away for your later years when you won’t want to work anymore.
As you plan to retire at 50, make sure you look at your health insurance and healthcare needs. As you age, your healthcare needs typically become more expensive and frequent.
The cost of health insurance could be high and, if not factored into your retirement budget, could derail your efforts to retire early.
With the appropriate planning, retiring at 50 is very achievable. Understand your money habits and continue working to improve them throughout your working career and beyond.
Be sure not to spend more than you make, continue maximizing your retirement savings, and plan for your withdrawal strategy.
If you want to spend less in retirement than you’re currently spending, work on decreasing your expenses as much as possible. Make sure you have a plan for healthcare coverage.
Who knows, you might be able to retire earlier than you think!