Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
So you’ve decided that life is too short to spend one second after your 50th birthday fighting with your coworkers over the office microwave. Retiring at 50 and spending the remaining decades surfing, feeding pigeons, reading Proust and doing whatever you darned well please is an understandable goal. However, unless Rich Uncle Pennybags drops dead and bequeaths you Boardwalk and Park Place, it’s going to require years, or likelier, decades, of preparation. To retire at 50, you’re going to have a lot fewer years to save money and so many more years in which to to spend it.
Here are 6 easy-to-follow steps to get your head in the early retirement game.
Start early, as in right now. Saving like a maniac is great but it's got to happen early. You won’t accomplish a heck of a lot if at 47 you decide you're ready to retire in three years. Retiring at 50 will require your savings to simmer for a very long time in an investment account, experiencing the magical power of compounding year in and year out. We’ll look at some specific numbers further down this page, but fiddle around with a compounding calculator like this one to get a sense of what time can do to money. Assuming a hypothetical, though historically reasonable 7% annual rate of return on an investment, a 25 year-old who manages to put $20,000 away every year will end up with almost $1.38 million by age 50. Put in that same $20,000 beginning at age 35, and she’ll only end up with $531,000 by 50. In fact, in order for that 35 year-old to end up with the identical $1.38 million by 50, she’d have to put away more than $50,000 a year to catch up to the early bird who started at 25.
Invest in stocks. So what's the best way to harness that miraculous compounding power we reference above? Why, through investing your savings somewhere that’s going to earn you some significant returns. Three ways that you will never, ever get those kinds of returns are by stuffing your savings in a mattress, depositing it in a savings account, or investing it all somewhere that’s considered very low risk, like in government bonds. One big disclosure that our very smart compliance folks insist upon: investing in stocks is speculative, and anyone who tells you otherwise is a big fat liar, so keep in mind that whenever you invest in stocks, you run the risk of losing a significant portion of your investment. That being said, historically, the annualized returns on the S&P 500 over the last 90 years have been just under 10%, which is a pretty stellar rate of return. One particularly effective way to take advantage of the natural growth of the market is by purchasing ETFs that track an entire economic sector or index, like the S&P 500. With such an investment, one price could buy you a tiny sliver of the 500 most valuable companies on the US stock market. High management fees can be as much of an impediment to retiring at 50 as carrying credit card debt, so before diving into the stock market, consult an investing guide like this oneto maximize your upside, while minimizing both your investment risk and the fees you pay.
Commit to living a debt-free lifestyle. You could follow every tip ever conceived for retiring early, but if you carry a significant amount of consumer debt, all will be for naught. Debt service—that is, the high cost you pay to borrow money—is like the Nosferatu of best laid early retirement plans. It will suck you dry of the money you absolutely need to be putting away towards your retirement. We're not talking so much about mortgage interest, though there are rent-don’t-buy evangelists who like to point out that the stock market provides returns that outpace those of real estate. The real enemies of your retirement plan are the various other forms of consumer debt, particularly credit card debt and car loans, which brings us to...
Become a cheapskate. Will a 10 year-old Honda Civic reliably deliver you to the office the same way a $60,000 Mercedes E-class sedan will? It will indeed, and even though strangers on the highway might not mistake you for a professional athlete, you’ll be able to save tens of thousands in payments, much of which will be made up of interest on what’s universally agreed to be a horrible investment. If you are serious about retiring at 50, a few line items will need to take a hit. Dine out less. Pretend all 5-dollar Starbucks coffees are laced with cyanide. Vacation at a national park you can drive to and dine looking at a picture of the Forum at a pizza joint called Bella Roma rather than flying off to see the real McCoy in Rome. Emulate the lives of the famous ascetics of early Christianity, not the Kardashians. A life eating generic cereal in head-to-toe Old Navy not for you? If you think you’ll be unable to stick to a budget that allows you to put away, 20, even 30 percent of your income every year, you might consider planning to work part time as well as downsizing significantly during your retirement. Consider a plan to sell your house and your car, and moving to a town with low rents and access to public transportation, or even a country with a significantly lower cost of living, preferably one where the locals are down to call you El Jefe.
Save smart. Most tax dodges will earn you hard time in the hoosegow, but the government has actually created some perfectly legal ones that you need to take advantage of if you intend to retire early. A tax-deferred account like a 401(k) could not only earn you some matching funds from your employer, it will allow you to pay taxes on income only when you withdraw it in retirement when your income (thus your tax rate) is lower. But wait, you might say, won’t tax-deferred accounts like 401(k)s penalize you if you withdraw money before aged 59 ½? Indeed they will, which is why you should plan to use other funds to finance your first ten years of retirement. But even if you do need to access retirement funds before 59 ½, there are a lot of ways to limit your tax hit, such as converting your retirement funds to Roth IRAs through what’s known as a Roth Conversion Ladder. The Mad Fientist, a guy who retired and 34 and has since devoted his life to studying financial independence (the “FI” in fientist stands for “Financial Independence”) has put together a pretty amazing guide to Roth conversion and when it should happen. Anyone interested in geeking out on the topic of early retirement must visit his laboratory.
How much money do you need to retire at 50?
So you’re ready to get down to the nitty gritty of how much cash you’re actually going to need for this adventure. Understand first we can only offer estimations based on the past. Nobody really knows what the world will look like even 10 years out in terms of the big factors that will directly affect your retirement plans, like interest rates, inflation, investment returns and the cost of living. But regardless of what the future holds, it's absolutely going to require a lot of money to retire at 50. Exactly how much depends on two questions, only one of which you really have control over: how much does your lifestyle cost, and how long are you going to live? 78.8 years is the average life expectancy in the US, so you can either take up cigarette smoking and twice-a-day Cinnabon eating, or hatch a plan that will keep you funded for more years than that. This is where the 4% rule is handy. The rule, a research-based guideline introduced by a financial advisor named William Bengen, states that if you withdraw 4% of your retirement savings annually, you will never run out of money, which is great for both 400 year-old vampires and mortals hoping to leave a tidy little inheritance for a spouse or heirs. Since the 4% represents an amount that consists primarily of interest and dividends, it’s a solid way to figure out what kind of nest egg you’ll need, regardless of your planned age of retirement.
Bearing in mind that we’re not including important variables, such as pension income, or Social Security income — a tool like this one will take all those factors into consideration-- $1,000,000 saved at the time of retirement will allow you $40,000 for the rest of your days. Want an annual gross income of$50,000? You'll need a $1.25 million portfolio. If you need $100,000 a year to live, you’ll want to amass $2.5 million. Of course, many, many people will spend more than 4% of their holdings every year, which is okay as long as you don’t run out and you’re not concerned about potentially causing some post-mortem grousing from your heirs.
Are you even allowed to retire at 50?
It’s a free country. You don’t have to raise your hand to go to the bathroom and you could retire at 25 if you really wanted to. Perhaps a more valuable question to ask yourself is, Can I afford to retire at 50? Our society provides a small safety net for retirees in the form of Social Security, but the government doesn't care about your retirement timeline. According to the Social Security Administration, 67 is considered full retirement age for those born after 1960, and it’s the age at which your full Social Security benefits will become available. But if you’ve retired at 50 and are willing to take less, you can start drawing Social Security at age 62, and get 70% of your full benefit; at 65, you’ll be able to take 86.7 percent of your full benefit. How much you’re entitled to depends on how much you’ve paid into the system over the years, but the current average payment is $1,400 per month, or $16,800 per year.
If you could hold off until age 67 to collect Social Security and wanted to gross $50,000 a year, you’d need to bring in an additional $33,200 annually to add to that average sum. To generate that much using the 4% rule, you would need to have a $840,000 portfolio at age 67. Someone hoping to spend $100,000 would need a little under $2.2 million at age 67, more if she wants to collect Social Security earlier. (The age at which it makes most sense to start collecting Social Security will likely depend on how rich you are.
Is $2 million enough to retire at 50?
Unless you’ve grown accustomed to spending your Christmases sunning yourself on a chartered yacht off Mustique, retiring with a $2 million portfolio could provide for a totally manageable, though not luxurious retirement. According to the 4% rule, you’ll be able to safely spend $80,000 a year without touching the principal, an amount which naturally depends on how much Social Security you’ll be collecting. Financial experts will often advise clients that they should budget for 70-80% of their pre-retirement income to maintain a comfortable standard of living, so $2 million should provide no shock to someone accustomed to earning $100,000 a year.
Is $3 million enough to retire at 50?
What’s 50% more appealing than retiring at 50 with $2 million? Doing it with $3 million. According to the 4% rule, you’ll be able to take $120,000 without touching the principal, and according to the 70-80 percent guideline we discuss above, someone accustomed to making $150,000 to $175,000 won’t feel lifestyle-deprived grossing that amount. Obviously, this is easier said than done, so congratulations if you have amassed this estimable fortune by the tender age of 50.