7 Steps to Retire at 50
Early retirement has become a popular financial goal. And well it should be. Even if you never retire early, just knowing that you can is liberating!
And it may just be the strategy that frees you up to take on even bigger challenges in life. That can happen when you reach the point where you no longer have to work for a living.
There are all different ages that people want to retire at, and for most people it’s probably something like as soon as possible! But let’s focus on how to retire at 50, since it’s a doable goal for a lot of people.
Step 1: Start Saving EARLY!
If you’re 25 right now, then you should start saving to retire at 50 now – as in immediately. The best way to prove the point is with a couple of examples.
If you decide to put off saving to retire at 50 for another five years – when you are 30 – and you begin saving $10,000 per year, invested at an average annual rate of return of 7%, then by the time you’re 50 you will have $425,341.
But if instead you decide to start saving right now – again, $10,000 per year, invested at an average annual rate of 7% – then by the time you are 50, you will have $656,227 saved.
Step 2: Earn more and Save more than everyone else
It’s a common belief that you can retire just by saving 10% or 15% of your annual income. And that may be true, if you plan to retire at 65, and have 35 or 40 years to save and invest money.
But if you’re serious about retiring at 50, you’re going to have to save more than anyone else.
That might mean saving 20% of your income, or maybe 25% or even 30%. Heck, if you’re much older than 25 or 30, you’ll have to save between 40% and 50% of your income if you hope to retire at 50.
What you can do is start out saving 20%.
But each time you get a pay raise or promotion with an even bigger pay raise, instead of spending the extra money, commit it to savings. After a few years of steady pay increases, you should be able to increase your savings rate to 30% or even more.
Saving such a large percentage of your income accomplishes two very important goals:
• It obviously enables you to reach your savings goals faster
• But just as important, it conditions you to living on less money than you earn
That second point will be really important when you actually do retire. The less money that you need to live on, the sooner and more effectively you’ll be able to retire.
Step 3: Pick a Secure investment strategy and stick to it.
Investing wisely is not an option for early retirees — it’s mandatory. Most official retirement plans, such as IRAs and 401(k)s, are good because they’re tax-free, and many employers will match your contributions.
However, most also have penalties for withdrawing money early, and many investors find that they simply don’t offer the returns necessary to get you out of the game by 50.
It may be tempting to make riskier investments in order to bring in bigger returns. Understand, though, that if you want to retire at 50, you’ll have less time to recover from mistakes.
If you’re 30 now, you only have 20 years to save and invest, and a big loss can ruin your plans. Invest conservatively: Evaluate investment opportunities like corporate bonds, rental properties, and or profit share investments. Make sure your portfolio is large and diversified across asset classes to help ensure that you can withstand any potential losses and survive.
Step 4. Mind the gap…Using Your Home Equity
Counting on social security to make the math work? How about a pension or a retirement plan? Chances are high that those won’t be available to you at 50.
As we’ve discussed, traditional retirement plans carry penalties for early withdrawal, and pensions and social security just flat-out won’t be available yet.
Non-retirement assets are necessary to bridge this gap between the day you retire and the day your benefits start rolling in.
One asset that can be a huge help toward early retirement is home equity.
Often, the timing is perfect to sell and downsize your home at retirement, offering a nice windfall. The IRS allows married couples and individuals to exclude large gains from the sale of their home from income tax, which can account for a sizeable bonus.
Step 5. Live beneath Your Means
One financial habit you’ll have to get into is to live beneath your means. That means that if you earn a dollar after taxes, you’ll have to live on say, 70 cents, and bank the rest.
That’s not an easy pattern to get into if you’ve never done it before, but it’s absolutely necessary. Unless you can master it then early retirement will be nothing more than a pipe dream.
In order to live beneath your means you’ll have to adopt a few strategies:
• Keep your basic living expenses low, especially your housing expense
• Drive an older car, one that isn’t expensive and doesn’t require you to go into debt
• Be proactive about finding bargains on whatever you buy – food, clothing, repairs, insurance, etc.
• Be conservative with entertainment, including and especially with vacations and traveling – early retirement planning and the good life don’t mix well
• Avoid eating out all the time – it’s a slow way to torpedo your long-term plans
Any money that isn’t going into living expenses is more money for savings.
Step 6: Stay Out of Debt
A word of warning about debt: it can undo everything you’re trying to accomplish in order to retire at 50. It will do you little good if you reach 50 and have $500,000 saved, but $100,000 in debt of various types (it’s easier to get to that level than you think – just live the TV version of the suburban lifestyle and it’ll happen all by itself!).
Not only does debt weaken your net worth, but it also comes with monthly payments. And you’ll need as few of those as possible if you’re going to retire at 50. Better yet, the goal should be to be debt-free entirely. Debt not only raises the cost of living in retirement, but it will reduce the amount of income you’ll have to dedicate to savings between now and then.
Being debt-free should include your mortgage if you own your own home or plan to. Your early retirement plan should include a sub-plan to pay off your mortgage in time for your retirement date.
Nothing goes better with early retirement than a mortgage-free house!
Step 7. Plan your getaway.
Retirement dollars stretch a lot further in some locales than in others, and it’s easier to retire early if you move to or settle in a place with a low cost of living. In the United States, the most affordable places to retire are often smaller cities and towns, tucked away from high tax rates and the demand for housing. If that doesn’t sound quite exciting enough for your early retirement, consider heading abroad.
Destinations such as Thailand, Vietnam, Cambodia and Phillipines offer the temperate climates, outdoor adventure and sandy beaches of your retirement dreams at a fraction of the cost of retiring in let’s say, Florida!.
Putting together the funds you need to retire at 50 is a challenge that the majority of people find difficult, if not distasteful. It involves a lot of delayed gratification from your hard work. But at the same time, the prospect of enjoying the freedom of retirement while you’re still in your prime is an almost irresistible proposition.
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