Have you ever wondered what it actually takes to take an early retirement and retire at fifty years old? For the most part it comes down to a combination of hard work, discipline, and careful planning. While it’s not an easy thing to accomplish, taking an early retirement at fifty can be achieved with the right mindset and with the proper financial plan, of course. Getting an early head-start when you’re in your twenties would be an ideal strategy, but very few think about taking an early retirement at such a young age.
With that in mind, let’s assume you’re starting your retirement planning in your late twenties or even early thirties. There’s a lot that can happen over a twenty-year period, especially during your thirties and then into your forties. These decades are often associated with significant life events such as getting married, having (and raising) children, buying homes, financing vehicles, career transitions, and more. To say the least, there are a lot of life events that take place. All of which can significantly impact your financial trajectory.
So how exactly do you balance everything mentioned while still increasing your retirement savings for an early exit? Let’s take a look at a few suggestions below.
Step #1: Redefine your definition of retirement
Golfing, fishing, and travelling around the world. That might just be how most people perceive their retirement lifestyle when they hit their sixties or seventies. But early retirement might not look like that in the slightest. The reason being is actually quite simple. It comes down to the available income and money you have for your retirement lifestyle. In order to start taking trips around the world and continue doing that for the next twenty years, you would have to have quite a significant retirement fund to do so. In fact, it’s also very likely that you’ll continue working on a part-time or contractual basis throughout your retirement when you take it early.
It’s recommended to have eighty percent (or more) of your pre-retirement income available to you after retirement. That could be a pension, 401(k), Roth IRA payout, or a combination of all. It could also be a part-time job, consulting, or freelance income. Modern retirees are opting to continue working, just not in their former capacity. In order to truly determine the amount of income and money you’ll need in retirement, you will need to first start with determining your desired retirement age and defining the lifestyle you’ll want to live when you retire. Start with that and then work backwards.
Step #2: Create or revise your financial plan
Once you’ve got a really good idea of what your retirement looks like, it’s time to create or revisit your financial plan. This is usually the first step, however, it’s always good to get an understanding of your retirement goal to help with the financial planning process.
Your financial plan is there to help you navigate your financial journey towards your retirement age, and even throughout your retirement years. It’s there to help you make those important and critical financial decisions that make sure you are always working towards your retirement goal, and not falling off the path. A proper financial plan will take into consideration all areas of your financial life, not just your saving and spending habits. This will help you fully prepare for everything coming your way. There are three ways you can get a financial plan: through a traditional financial planner, creating your own, or using online tools and platforms like Savology.
Savology can help you by providing access to a free retirement calculator and free online financial plan in just five minutes. When you sign-up, your plan will provide action items that show you the exact steps you need to take in order to make improvements and reach your goals. The other two alternatives can end up being costly and time-consuming.
Step #3: Plan for thirty years or longer in retirement
The average life expectancy in the United States is just under eighty years. That’s an increased life expectancy of more than 10 years compared to 1950.
With modern medicine and healthcare, people are living longer lives. This is something that needs to be taken into consideration when you are planning for your retirement, notably the amount of years you will spend as a “retired” individual. Planning for a thirty year period should put you in a good spot with your retirement plan, however it doesn’t hurt to add another 5 year buffer if you can. Set an annual number that you feel comfortable with, one that will take care of all your living expenses and leave you enough to enjoy life. Then multiply that number by thirty.
Let’s assume your number is fifty thousand per year. Next, you need to figure out how you can save enough in twenty years to generate $50K per year in income for the next thirty to thirty-five years. Invest wisely. Spend frugally. Save vigorously. Most importantly, remember that every dollar you invest will generate additional income for you.
Step #4: Max out all of your retirement accounts
In 2019, the maximum contribution limit for a 401(k) plan was $19,000. That goes up every year with inflation, but let’s assume it’s a constant. Add another $6,000, which is the maximum contribution for a traditional IRA or Roth, and you’re looking at $25K per year. In twenty years, that’s $500,000. Assuming you’ll get a 6-10% returns that are compounded, you’ll do okay.
While this is a good step in the right direction to retire at 50, it’s certainly not the easiest way. For one, saving $25,000 every single year is challenging. In order to do so confidently, you’ll need to be earning a very significant income while also being able to keep your cost of living down to a minimum. In addition, it’s also important to know that maxing out your retirement accounts may still not be enough to give you a life of luxury in your golden years. Regardless, you need to do everything you can to save, invest, and max out these accounts.
Step #5: Open a high-yield savings account
This step won’t make you rich, but it will protect your other accounts and assets. A high-interest savings account is a safe place to park some money to use as a reserve and an emergency fund. Emergency funds are like self-insurance to ensure that you avoid dipping into your retirement funds early, and without penalties. However, in this particular scenario, you’ll also need it to get through the first ten years since you can’t take retirement disbursements until age 59 ½ without penalties. That’s not to say you should blow through all your savings in the first ten years. Rather, consider this your safety net, not a primary income source.
Since interest rates on savings accounts are significantly lower than the average return of an investment account, you’ll normally want to spend these funds first so that you remain taking advantage of the higher earning potential in your other accounts. The state of the market may dictate otherwise, though.
Step #6: Open a non-retirement investment account
Retirement accounts have maximum contribution levels. Non-retirement investment accounts do not. By opening up and contributing to non-retirement investment accounts in addition to maxing out your retirement accounts is where you can separate “just coasting” in retirement to seriously living and enjoying every life moment.
Your pension or 401(k), supplemented by savings, will cover your basic living expenses. A properly diversified investment portfolio could add a steady income stream on top of those.
Step #7: Don’t neglect your health care
During your employment years, health insurance is usually taken care of. What you pay out of pocket for it isn’t relevant because you never see that money. Once you’re retired, that changes. In fact, this is one of the most commonly neglected areas when people plan for an early retirement. It’s also the area that most people should be prioritizing. Unfortunately, you’re eligible for Medicare until you turn 65. Figuring out how to navigate your healthcare when you return until Medicare kicks in becomes an immediate concern and priority. You need to figure out what you will do in the meantime.
Some employers may allow you to stay on their health plan if you cover the full cost of the premium. COBRA could buy you eighteen months of coverage after retirement. Alternatively, you could set up an LLC and take advantage of group health insurance rates through your local Chamber of Commerce. However, when it comes to your health it’s in your best interest to make sure you are fully aware and confident in your decision. This is one area where it is extremely wise to seek professional financial advice.
Step #8: Start a new business while you’re still working
There are benefits to owning a business, even while you’re still working. If you form a Limited Liability Corporation (LLC), you can itemize deductions on your Schedule C and offset some of your household overhead. As a retiree, the corporate structure can be used to distribute income to your personal accounts and alleviate some of the tax burdens and liabilities.
Another benefit of starting a business while still working is the opportunity it provides to build your own brand. Remember the definition of retirement we mentioned in the first step. This is the step where you begin to define that. Use your brand and business to start a consulting service. Set up an online store. Create a freelance profile as a writer, web designer, or specialist in your chosen field. By doing this, you will be able to give yourself future income-earning opportunities that will help bring in part-time or project-based income throughout your retirement years.
Step #9: Keep your expenses low
One of the biggest pitfalls to anyone’s retirement plan is their tendency to start spending more after the previous steps have taken place. In order to not only reach retirement but to live comfortably throughout your entire retirement is to keep your spending in check. Remember, you have twenty years to hit your retirement target. That leaves you with very little room for error and additional spending.
It’s not all about frivolous spending either. One of the best financial exercises you can do is analyze your current budget and look to identify what types of expenses you can reduce or eliminate immediately. Unused subscriptions? Cancel them. That premium cable and internet package that you’re not taking advantage of? Downgrade it to the basic one. Eating dinner out three times a week? Cut it back to twice, once if you can.
These are only small examples, but they’re also very common ones. As you analyze your budget, you will start to see how and where you can not only save money, but also put it to better use. Remember, a dollar saved is a dollar earned.
Step #10: Beware of the Bear
Last but not least, timing of when you officially “retire” is something that you will need to consider heavily. Even though it’s not something any of us can predict, it should always be on your radar. Retiring at the beginning of a bear market cycle means that you’ll be consuming principle that’s been significantly reduced by the market downturn. This is known as “sequence risk.” Retiring at the wrong time can turn those thirty years of comfort into twenty years of sparse living if you’re not careful. If you find yourself in this situation, consider holding off for at least twelve months before you pull the trigger on your retirement.
Remember, just because you’re planning on retiring at 50 doesn’t mean that you should. Even if you end up reaching your goals and things are going according to your plan. An average bear market lasts 1.4 years and they happen roughly every six years. Keep an eye on the market and push your retirement date up by a few years if you’re in danger of sequence risk. Those extra few years working won’t hurt you. Depleting your investment accounts in a down market will. When you plan for and choose to take an early retirement, you are putting yourself in a position to face more risk. By waiting a few additional years, and ensuring that you have a contingency plan and buffer, you will be able to navigate your way through your retirement years with confidence to ensure you are living the best life possible.