How To Retire At 50 in 8 Steps
JA
Summary:
Anyone can retire at 50 if they start saving and investing early enough (and aggressively enough), pay off their debts, and keep their expenses under control. You may also want to hire a financial planner to advise you on the best savings strategies and start saving in an account with compound interest to truly gain financial independence by your 50th birthday.
With the FIRE (Financial Independence Retire Early) movement gaining significant traction in recent years, many around the world are starting to consider leaving the job market early. Instead of retiring at around 65, as most people do, early retirees get to enjoy the relaxing retirement lifestyle as early as 50 or even younger. After all, who says you have to wait until 65 to retire?
As long as you can financially support yourself, you can quit your job for good and travel the world at any age. However, for many people, reaching financial independence can take decades, which is why the majority of the workforce can’t afford to leave their jobs until their golden years.
So if you’d like to retire by 50, read on to discover what actionable steps you can take to make early retirement a reality.
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1. Increase your savings rate
Financial experts recommend saving at least 15% of your pre-tax income for retirement. For example, you’d have to contribute at least $15,000 of a $100,000 salary towards a retirement savings account.
Luckily, you have a few options for where to put these funds. For instance, you can add this income to different retirement accounts, a high-yield savings account, or even a high-yield checking account (though this may make your retirement funds easier to spend).
Also, don’t forget to use a budgeting app like Mint or Personal Capital to help you keep track of your spending. And to ensure you reach your savings goal, automate your saving by setting up recurring monthly transfers from your checking account to your savings account. If you don’t have a savings account with this feature yet, you may want to consider opening one of the accounts below.
Pro Tip
If you plan to retire early at 50, you might have to increase your savings rate substantially to reach your retirement goal. For example, the FIRE movement followers usually save anywhere from 50% to 75% of their income to gain financial independence early.
2. Maximize your income
If you’re making $30,000 a year, you probably don’t have much left for retirement savings (unless you have amazing budgeting skills). But if you’re making $100,000 a year, your savings rate can increase dramatically (provided that you don’t fall victim to an expensive lifestyle).
So don’t just focus your efforts on saving money and try your best to maximize your income as well. Start by negotiating higher pay for your work, selling unwanted items in your home, or looking for a better-paying job. You can also start working a side hustle, like one of the below positions.
3. Keep your debt under control
Retiring with a mountain of debt can make your retirement years a lot more stressful than it needs to be. Plus, every dollar you owe reduces your retirement income. So if you can, try to pay down your debt as much as possible before heading into retirement.
First, figure out what debts you have and how much you owe in total. Then, get serious about tackling your debt by making additional monthly payments, taking out a debt consolidation loan, or getting help from a financial advisor.
4. Invest aggressively
You’d want to have an aggressive investment strategy to reach your savings goal early and live a comfortable retirement lifestyle. Focus on growth assets (such as stocks) across small, mid, and large-cap companies in both United States and global markets.
The further away you are from retirement, the more risk you can withstand. So if you’re still in your 20s or 30s, consider building more aggressive portfolios that can yield larger gains instead of solely focusing on low-risk investments like bonds and CDs.
Keep in mind that having an aggressive investment strategy doesn’t mean you should invest carelessly. Avoid the FOMO emotional trap and only stick with investments that you’ve done your research on. You can also reach out to an investment advisor for advice on your specific situation and plan for retirement.
5. Work with a financial planner
If you don’t have an early retirement plan yet, you might want to consider working with a certified financial planner. Financial planners specializing in retirement planning can walk you through the steps you need to take to reach your retirement goals. They can help you with saving, investing, budgeting, and even estate planning.
But before hiring a financial planner, make sure to perform your due diligence and vet your options carefully.
6. Take advantage of employer matches
If your employer offers to match your 401(k) contributions, take advantage of it. It’s essentially free money. These matches are made on a percentage basis, and the most common matching structure is 50% of the employer contribution, up to 6% of their salary. Plus, your 401(k) contributions are made with pre-tax dollars and can lower your taxable income.
So if you haven’t already done so, enroll in your company’s 401(k) plan and determine how much you need to contribute to fully take advantage of this benefit. Don’t forget to set up automatic contributions so you won’t be tempted to spend that money elsewhere.
Pro Tip
In addition to your 401(k), don’t forget to max out contributions to your health savings account. You can use this account to pay for qualified medical expenses using pre-tax dollars instead of paying out of pocket, which can help you save even more.
7. Live below your means
Many of us fall victim to “lifestyle creep” without noticing it. As we earn more money, our standard of living slowly elevates along with our higher income. And if we’re not careful, we can easily let this lifestyle inflation eat into our savings, pushing back our desired retirement date and leaving our emergency fund empty.
If you want to speed up your savings rate, it’s crucial to live below your means and save more than you spend. Without a positive cash flow, building a nest egg is impossible. So next time you’re tempted to upgrade to a more luxurious apartment or buy a second car, think again.
8. Understand the power of compound interest
In a nutshell, compound interest allows you to earn interest on the interest earned and helps you grow your money exponentially.
Here’s an example to help illustrate how powerful it can be: If you were to save $1,000 a month from the age of 25 in a retirement account earning 8% a year, your $480,000 total investment would grow to around $3.1 million by age 65. However, if you were to start saving at 35 instead of 25, your $360,000 total investment would only grow to $1.3 million by age 65. In other words, you’d receive around 645% returns on your total contributions if you start at 25, compared to 360% returns if you start at 35.
The power of compound interest is undeniable. Even the great Albert Einstein is believed to have once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” If you want to have enough money in your retirement years to live a comfortable life, make sure to take advantage of compounding and start saving early.
Pro Tip
You can play around with this compound interest calculator to help you understand why you should start saving as soon as possible.
FAQs
How much money should I have to retire at 50?
If you aren’t sure how much money to save to retire at 50, use the 4% rule to figure it out. Here’s how it works: Determine your desired annual retirement income, then divide that number by 4%. So let’s say you want to continue earning $70,000 during your retirement years; you’d want to save at least $1,750,000 ($70,000/4%) before saying goodbye to your job.
Can you legally retire at 50?
Yes, you can retire at any age you want, as long as you can financially support yourself and cover your basic living expenses. But remember that retiring at 50 isn’t usually the norm for most people. If you plan to retire early (and rich!), be sure to start saving now to give compound interest enough time to work its magic.
How much money do I need in 401(k) to retire at 50?
There’s no one-size-fits-all answer to this question. How much money you need in a 401(k) to retire at 50 will largely depend on your retirement expenses and desired lifestyle. Moreover, this number can change depending on whether you’d receive additional monthly income from Social Security, pensions, part-time jobs, etc.
Also, keep in mind that maxing out your 401(k) isn’t mandatory, though recommended. If you don’t want to put your retirement savings in a 401(k) account, you can always opt for Roth IRAs, health savings accounts, SEP IRAs, or other types of investment accounts instead.
What happens if you retire at 50?
Once you retire at 50, you’re free to spend your time however you like. You don’t have to conform to a typical work schedule anymore or deal with difficult bosses.
But one disadvantage of retiring early is that you’ll have to wait a few years before you can collect Social Security. Unless you’re disabled, the earliest you can start receiving social security benefits is at the age of 62. Also, if you have money in your 401(k) or Roth IRA account, you won’t be able to make penalty-free withdrawals for another decade.
IMPORTANT! Remember that you can’t withdraw from your 401(k) before you turn 59½. Otherwise, you’ll have to pay a 10% early withdrawal penalty on top of ordinary income tax (if you have a traditional IRA).
What age do most people retire?
In a recent survey, Gallop found that the average retirement age for Americans is 62. So if you’re on track to retire at 50, you’re way ahead of the curve.
What is a good monthly retirement income?
A good monthly retirement income is whatever amount you need to live comfortably. For some, it may be $50,000 a year; for others, it might be well over $100,000 a year.
Financial professionals and experts recommend that you replace at least 80% of your pre-retirement income to sustain the same level of lifestyle after you retire. So let’s say you were making $120,000 a year before retirement, you’d want to aim for at least a $96,000 annual retirement income ($8,000 a month). That said, don’t forget to think about inflation when figuring out your future retirement income.
Key Takeaways
- Experts recommend saving at least 15% of your pre-tax salary for retirement. But if you want to retire early, you might need to save much more than that.
- The 4% rule is a popular rule of thumb to help you figure out how big your nest egg needs to be to generate your desired retirement income.
- To retire early at 50, it’s important to start saving as soon as possible and take advantage of the power of compound interest.
- Consider working with a financial planner if you need help setting retirement goals and developing plans to reach them.
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