Everything you need to know to retire at 50 starts here.
Can I retire at 50?
So you want to retire at 50. Who wouldn’t? If the financial independence, retire early (FIRE) movement is any indication, early retirement is consuming a larger and larger portion of the American psyche. FIRE retirement practitioners aren’t waiting until 65 to retire. Instead, they’re retiring early by achieving financial independence (when your money makes enough money that you no longer need to work) decades before conventional wisdom says they should be able to retire. Here are the 11 steps to financial independence so you can retire at 50.
Start with how much you’ll spend.
FIRE retirees use a goals-based approach to saving. Rather than starting with a certain age (such as 65), they begin with how much money they need to retire. To determine what you need to retire at 50, calculate what you’ll spend in retirement. A good starting point can be your current spending. Take what you spend today and subtract the costs of working, such as transportation and lunches out, says Billy Kaderli, who was vice president of investments and branch manager at Dean Witter Reynolds before retiring at age 38. Try to be as detailed and exact as you can. As you’re about to see, your future depends on it.
Plan for the cost of health care.
As you’re building your early retirement budget, add a line item for health care. Retiring at 50 means you’ll have 15 years before you’re eligible for Medicare. While some employers offer coverage for retirees, it’s increasingly uncommon, says Erin Brand, wealth strategist at PNC Wealth Management. And even if your employer provides retiree health insurance, chances are it’ll be significantly more expensive than the rate you pay while you’re still working. You may also want to have a solution in place for extended care coverage, such as home nursing care or staying in a skilled nursing facility, Brand says. Extended care is one of those unexpected expenses that can bankrupt unprepared retirees.
Calculate how much you need.
The second input in calculating how much you need to retire at 50 is your target withdrawal rate. As a rule of thumb, retirees can typically withdraw 4% (adjusted for inflation) every year for 30 years without depleting their portfolio. Given the increase in life expectancy these days, someone retiring at age 50 may need to plan for a bit more than 30 years. To compensate for this, many FIRE early retirees use a 2% or 3% withdrawal rate. Take your anticipated annual expenses in retirement and divide it by your target withdrawal rate. For example, $50,000 annual expenses at a 2% withdrawal rate might mean you need $2.5 million to retire at 50.
Save like your retirement depends on it.
Once you know how much you need to save to retire early, it’s time to get serious about your savings rate. Maximize your contributions to any retirement plans you have access to, including workplace plans, individual retirement accounts and health savings accounts. If you aren’t already at the max, sign up for auto increases, Brand says. While the conventional 10% to 15% savings rate is a good guideline for a traditional retirement, “someone with the ambitious goal of retiring at 50 needs to look higher,” she says. Depending on how much you have saved already, this could mean saving upwards of 50% of your salary.
Keep your expenses low.
The only way to save more money is to spend less. “Pay attention to your lifestyle and do what you can to live well below your means,” Brand says. You may need to “make some hard choices that’ll allow you to save today so you can live a more comfortable lifestyle in retirement.” Instead of that premium cable package, pick one streaming service or rely on the library (or friends’ log-ins) for free entertainment. One area to keep a particularly sharp eye on is your cell phone bill, Brand says, which she sees taking up an increasingly large part of her clients’ budgets.Be smart about taxes.
Speaking of costs, taxes are the early retirees’ nemesis. The more you can shelter your savings from taxes, the more they’ll be able to grow. In addition to taking advantage of any retirement savings, Brand suggests itemizing deductions, if it makes sense for you. You can also minimize taxes by being strategic about how you tap your investments in retirement. For instance, Kaderli opted to use capital gains from the sale of investments for income rather than dividends because capital gains are taxed at a more favorable rate.
Increase your income.
Cutting costs is an important element of retiring early, but it can only get you so far to your retirement savings goal. Ultimately, the amount you can save is capped by how much you earn. Early retirees know the importance of increasing your income if you want to retire by 50. “Having a small hobby or business on the side can be helpful in providing extra income, both before and after retirement,” says Darrow Kirkpatrick, who retired from engineering at 50 and has since founded the “Can I Retire Yet?” blog. It can also provide a much-needed retirement project.
Invest for growth.
Investing is essential to financial independence. Your savings need to be invested to generate the returns necessary to replace your paycheck. Kaderli calls this “creating the money machine,” where your portfolio grows faster than the rate of inflation and your spending.” Kirkpatrick points to three investment paths FIRE strategists use: low-cost index funds (the simplest path), dividend investing and rental real estate (the quickest path, if done right). Early retirees need investments in three categories. Brand says cash or cash equivalents, income-producing investments like bonds and investments for long-term growth like stock. With time on your side, she encourages early retirees to “be quite invested in growth-focused investments.”
Plan how you’ll spend your time in retirement.
When asked what they would do differently if they had one retirement do-over, many recent retirees wish they’d better planned how they’d spend their time in retirement, Brand says. Many people derive their identity and sense of purpose from their jobs. Without that, they run the risk of slipping into aimlessness and depression. Akaisha Kaderli, who retired with her husband, Billy Kaderli, at age 38 in 1991, suggests creating a list of the things you want to do, learn or see in retirement. You may not accomplish all of them, but having a list to fall back on can be an emotional savior. It can also help you project your retirement expenses.
Stay informed of legal changes.
One of the biggest challenges of planning for the future is the fact that what is today may not be the same tomorrow. The SECURE Act, which went into effect in January 2020, is a prime example. Under the act, retirees are able to delay minimum required distributions until age 72 and can contribute to individual retirement accounts, known as IRAs, at any age provided they have earned income. Both of these are positive changes for early retirees. Less positive is the fact that the act eliminates the stretch IRA, which allowed nonspousal beneficiaries to withdraw from an inherited IRA gradually over their own lifetime. Now nonspousal beneficiaries are required to liquidate inherited IRAs or 401(k)s in 10 years. This could have dire tax consequences as beneficiaries are taxed on distributions at their income tax rate and could be pushed into higher tax brackets by the inherited assets.
Choose your retirement year wisely.
The last step to retire early is choosing the year you retire with care. “One of the biggest risks any retiree faces is retiring into the beginning of a bear market,” Brand says. If you retire in a year your investments have lost value, you may need to take out more than your target withdrawal rate. “If that happens, it can have a negative near-term impact on your portfolio that can be hard to recover from,” she says. Kirkpatrick had to postpone his retirement when the bottom fell out in 2008. “I didn’t panic, kept investing and retired three years later,” he says.
How to retire at 50:
- Start with how much you’ll spend in retirement.
- Plan for the cost of health care.
- Calculate how much you need to retire based on your projected annual expenses and target withdrawal rate.
- Save like your retirement depends on it.
- Be smart about taxes.
- Increase your income.
- Invest for growth.
- Plan how you’ll spend your time in retirement.
- Write your early retirement plan down.
- Choose the year you retire wisely.
- Stay abreast of legal changes.
Author: Coryanne Hicks
Source: Money. US News: 11 Steps to Retire By Age 50