How to retire at 50

If you're planning to retire by age 50, you should be congratulated for your ambition and optimism. But, as many who've made the effort would surely tell you, ambition and optimism alone won't get you over the finish line on time. Unless you're already independently wealthy or anticipate a large inheritance, it's going to take a clear vision, a years-long commitment, and a fully formed financial strategy to get where you want to go.

Here, we'll spotlight the essential steps needed to achieve that goal and enjoy a comfortable, stable retirement with less financial stress. You’ll learn about:

• The unique financial challenges of retiring at 50

• What to consider in developing an early retirement plan

• How much money you may need to retire early

• How to save and invest for an early retirement

What will your retirement look like?

Planning for retirement at 50 is similar to normal “60-something” retirement planning with one major difference: If you plan to retire at 50, many of the required tasks - including building an adequate retirement fund - will have to be completed on an accelerated timetable. So ask yourself:
Are you prepared for the unique financial challenges of early retirement?

The issues you’ll need to consider include:

• Social Security: The earliest you can claim Social Security is age 62. Plus, activating benefits before the full retirement age of 66 or 67 reduces payments. So, if you plan to retire at 50, you'll have to live without Social Security for at least 12 years, and - depending on when you start receiving benefits - you may get reduced payments for the entire length of your retirement.

• Individual Retirement Accounts (IRAs): Withdrawing from taxable retirement accounts before the age of 59 ½ often incurs significant financial penalties.

• Health insurance: Since you won’t be eligible for Medicare until age 65, you’ll have to find another source of coverage once your employer-sponsored insurance or COBRA expires.

Bottom line, unless you’re willing to incur penalties for early withdrawals, you should aim to have sufficient funds to carry you from age 50 to at least age 59 ½ without tapping into your taxable IRA. Plus, you’ll have to live without Social Security benefits until at least age 62, and you may have to shoulder the added expense of health insurance. Be sure to consider these issues carefully when making your decision about retiring at 50.

How long will your retirement last?

This can be a tricky calculation, but it’s important to have some idea of how many years you’ll have to rely on your retirement savings, especially since you plan to retire early. Think about the average longevity in your family, your current health status, and the life expectancy of people in the same socioeconomic group as you.

The 4% rule a well-known (but somewhat controversial) guideline that says retirees can withdraw 4 percent of their savings during the year they retire, and then add to their yearly withdrawals to account for inflation for the next 30 years¹ without exhausting their savings. However, rising life expectancies coupled with the ever-present possibility of a market downturn are causing many experts to be skeptical about this “rule.” In any case, if you retire at age 50 and anticipate living beyond the age of 81, you’ll probably have to reduce this percentage to reflect the additional years that you’ll be dependent on your savings.

What type of lifestyle do you envision for your retirement?

Next, consider what kind of lifestyle you'd like to have after you stop working. Do you plan to stay in your current home and maintain your current lifestyle? Do you hope to move to a resort location where housing and other costs may be higher? Are you planning to travel or take up costly hobbies? Or, conversely, do you plan to downsize and cut back to minimize your financial needs?

These are important questions to consider. Your lifestyle in retirement will, in large part, determine your expenses in retirement – which in turn, determines how much retirement savings you'll need. This will be a key consideration as you're trying to determine if retiring at 50 is viable.

How much income will you need in retirement?

Generally, experts recommend having enough income from all sources to replace at least 70-80% of your pre-retirement income. That said, it is important to carefully estimate what your expenses will be. This will take more than a few minutes but is central to the planning process. So, be sure to go through the following steps.

• Start by recording your current monthly expenses. This will serve as a baseline for estimating your expenses in retirement.

• Think about the impact of inflation. Assume an average inflation rate of about 3% per year.

• Consider any anticipated lifestyle changes – such as downsizing or relocating – and how they might affect your expenses.

• Add in healthcare costs. Since you won’t be eligible for Medicare until age 65, health insurance may be a major expense until that age. Also, remember that generally speaking, overall health care costs increase as you get older.

• Evaluate your outstanding debts – including mortgage payments – and figure out whether they’ll be paid off by the time you retire.

• Think about any plans you have for retirement - such as travel and new hobbies – and include the estimated costs in your calculations.

• Consider any other potential expenses, from helping an adult child to buying or leasing a new car.

Finally, assume that there will always be unanticipated needs such as emergency home maintenance, and build in some sort of cushion to reflect this reality.

How much income will you have in retirement?

The next step is determining if you will generate enough income to cover your estimated living expenses in retirement – especially in the years before you can tap into your taxable retirement accounts without penalty and/or start collecting Social Security. It’s an important step and can help to green light your plan or, conversely, red flag any issues of concern.

• Check your Social Security account to determine how much you can expect when you begin collecting.² But remember, the earliest you can collect Social Security benefits is age 62. So if you plan to retire at age 50, you’ll have to rely on other income sources in the interim.

• Assess the balance in your 401(k) and IRA accounts and estimate the potential growth over time. Consider any employer contributions that will contribute to your retirement savings. Then, estimate the amount of income your savings would generate at a moderate or average rate of return. But as an early retiree, remember: Withdrawals from taxable retirement accounts before age 59 ½ usually incur penalties, which will reduce your total income until that age.³

• Consider any pension plan or other company retirement plan that will contribute to your retirement income.

• If you have an investment portfolio in addition to your retirement accounts, estimate the future annual returns after taxes. A non-IRA investment portfolio may be a critical component of your financial strategy in the years between age 50 and 59 ½.

• Factor in any other sources of income, such as rental properties or part-time work. As with an investment portfolio, these sources of income may be important in the years before you can start making penalty-free withdrawals from taxable retirement accounts and/or collect Social Security.

With these factors in mind, you should be able to determine whether you'll have sufficient income to cover your expenses. Among the key questions to address:

Will you have sufficient funds to carry you from age 50 to at least age 59 ½ without making substantial withdrawals from your taxable retirement accounts and without the benefit of Social Security income?

If not, start thinking about any changes that might help you to balance your budget – such as reducing anticipated expenses or increasing your retirement savings rate.

How can you save for retirement at 50?

By following the steps above, you should be able to arrive at a ballpark retirement savings goal – approximately how much money you’ll have to save to help ensure a stable retirement starting at age 50. The next step is to develop a retirement savings strategy that can help you reach your goal. Here are some basic tips:

• Start by setting clear savings goals: Determine how much money you’ll need to accumulate by age 50. This will help you to develop a savings strategy for reaching your goal.

• Estimate how much you can afford to save: Calculate how much money you can afford to apply to retirement savings each month. If you're not happy with the number, think about where you might economize to free up additional funds.

• Take full advantage of employer-sponsored retirement plans: If your employer offers a 401(k) or other workplace retirement plan, try to hit the annual contribution limits. And remember: Matching contributions offered by your employer help your retirement savings grow faster.

• Take full advantage of IRAs and Roth IRAs: If you’re self-employed or have the funds to supplement an employer-sponsored retirement plan, consider opening an Individual Retirement Account. IRAs offer tax benefits. As an early retiree, you may want to consider whether to open a Roth IRA or Traditional IRAs. Why? After a 5-year holding period, you can withdraw contributions from a Roth IRA at any age with no penalty (however, earnings may still be taxable before 59 ½. But withdrawing contributions or earnings from a Traditional IRA before age 59 ½ will typically incur penalties.

• Diversify your investments: Allocate your retirement contributions across a diversified portfolio of investment options offered within the plan. Use a combination of financial vehicles to balance risk and potential returns. Remember, investing involves risk, so consider your risk tolerance and goals when selecting the appropriate mix.

• Consider life insurance to help with wealth building: In addition to protecting your dependents with a death benefit in the event of your untimely death, cash value life insurance – whole or universal – can also accumulate tax-efficient cash value.⁴

• Think about an annuity: While not appropriate for everyone, annuities offer a steady cash flow during retirement, providing financial stability and confidence. Plus, they often offer tax benefits, which can help to reduce tax burdens and increase retirement savings.

• Regularly review and adjust your strategy: Review your retirement strategy periodically to ensure it aligns with your evolving financial situation and goals. Adjust your contributions and investment allocations as necessary.

By starting as soon as possible and following these steps, you can increase the chances of retiring early and having a financially confident retirement. Should you need some assistance in this area, there are any number of financial professionals who can help.

Guardian can help

As you get deeper into the retirement planning process you may want to consult a financial professional – such as a certified financial planner or a tax advisor - with specialized experience. If you don’t currently have someone who can advise you, we can help. A Guardian financial professional will listen to your needs, help define your goals, and help you to better understand the retirement planning process and make the right decisions. Here’s how to find someone near you:

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