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By Stephen Sellner | Citizens Bank Staff
Today, the average American retires at around age 63. But what if you wanted to retire at 50 instead?
For some people, this type of early retirement is their top financial goal. Their dream is to work hard and sacrifice throughout their early years so they can live the rest of their lives on their own terms.
While it’s possible to push your retirement date up by 10-plus years, it’s bound to take more than living below your means throughout your 20s, 30s, and 40s. You’ll also have to maximize your biggest accumulation years, make savvy investment decisions, and catch a little luck along the way.
There are lots of factors at play when trying to retire by 50. Here are seven considerations to get you started.
One rule of thumb is you’ll need to have between 60% and 100% of your pre-retirement income available for every year of retirement. Where you fall in this spectrum depends on the type of retirement you envision. For example, if you plan on traveling around the world, you’ll draw closer to 100% of your former income. But if you’re envisioning a modest retirement lifestyle, you may only need 60%.
To get a ball-park figure of how much you’ll need, start by estimating your expected salary by age 50. Then, depending on the type of retirement you want, multiply that salary number by anywhere between 0.6 (60%) and 1.0 (100%) to get an idea of how much you’ll need to finance each year of your retirement.
The average lifespan in the U.S. is 78.6 years. Why include this gloomy statistic? Because any effective retirement plan needs to consider how many years your money needs to last.
Using this statistic, if you retired at 50, your retirement funds would need to last 29 years. Now you can multiply your annual retirement allowance by 29 to get an estimate of how much you’ll need to accumulate in order to retire by 50.
Note: Talk to your doctor about your family history to get a better understanding of your expected lifespan.
Retiring at 50 isn’t easy, mainly because you’ll have fewer years to accumulate assets. How you can make up for that loss of time varies.
If you’re fortunate enough to draw a large salary, you could afford to invest more modestly and still have enough wealth to retire by 50. Or, if you don’t have a high salary, you could chase higher returns with a more aggressive portfolio to help get you there. Just remember that aggressive portfolios are made up largely of stocks, which are volatile.
Either way, success is dependent on a solid plan and, depending on your investment strategy, some good fortune. Investment-wise, you could either go through a financial professional or manage your own portfolio. Keep in mind that financial professionals charge fees and/or commissions, but if your “retiring by 50” plan is heavily dependent on a savvy investment strategy, then it could be money well spent.
Tax-advantaged retirement accounts like 401(k)s and IRAs have annual contribution limits. For people under 50, the 2020 limit for 401(k) contributions is $19,500 while IRAs are limited to $6,000. By maxing out one or all of your retirement accounts, you’ll have more tax-advantaged retirement money that can compound over the years.
However, finding $19,000 to contribute to your 401(k) every year takes more than cutting the cable cord. That’s especially true when you’re in your 20s, still climbing the professional ladder. In your 20s, live as far below your means as you can — hold off on lavish vacations, drive your beat-down car as long as it’ll run, and direct all of those funds toward the future. The sooner you can max out your retirement accounts, the better.
Planning to retire early takes sacrifice. But if it’s important to you, they’re necessary sacrifices.
Retirement accounts have a 10% penalty for withdrawals taken before you turn age 59 ½. Therefore, if you retire at 50, you’ll need to tap into other resources to finance those first 10 years.
Those “other” resources will have to come from traditional savings or by withdrawing from your brokerage accounts. That is, unless you’ve recently received a large inheritance. That would certainly come in handy.
Since there are no withdrawal dates for brokerage accounts, you could begin withdrawing money at 50 when you enter retirement. All withdrawals are subject to taxes, but only on the return portion of your investments.
This point is tied to the life expectancy note mentioned earlier. Healthcare is one of the biggest expenses in retirement. If your family has a history of chronic illnesses, that could impact how much money you’ll need for retirement. Keep in mind that long-term care insurance can cushion the cost of nursing homes and other healthcare costs you could incur in retirement.
Just because you retire doesn’t mean your money has to stop working. As you get closer to 50, come up with a plan to stretch your money through retirement.
A common strategy is to ladder with bonds, Roth IRAs, or certificates of deposit (CDs). Other retirees work part-time jobs in retirement to keep money coming in. These strategies, when executed properly, can maximize your money. Again, this is where a financial professional can help.
Retiring early isn’t easy. You’re trying to build more wealth in less time, so naturally that’s challenging. It involves making financial sacrifices in your 20s, 30s, and 40s, then using those savings wisely to build wealth.
Consulting with a financial professional can help you create a plan to proceed wisely and confidently during your younger years so you can reap the benefits when you turn 50.
It’s always important to have a game plan for retirement, especially when you’re hoping to retire early. To learn how to develop a plan of your own, schedule a Citizens Retirement Checkup® at your nearest Citizens Bank branch.
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