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It doesn’t matter if you’re 25, 44, or 65; retirement has a way of sneaking up on you.
If you want to retire before the traditional age of 65 to 70, you need to pay close attention to your finances and consider what you’ll need when your employment income stops. But for those who want to retire at 50, clear savings and investment goals are critical for sustaining your lifestyle.
You can’t depend on Social Security for more than a decade if you retire at 50. So you need enough money to make it completely on your own until then. Here’s a closer look at how much you need to retire at 50 to help you make the best financial preparations.
How to Retire at 50 (TL;DR)
- If your goal is early retirement around age 50, you’ll need to prepare carefully with significant savings and investments to cover your cost of living.
- There are different ways to estimate how much you’ll need to retire by 50, such as the 10x Rule, the Rule of 25, and the 4% rule.
- You can use several kinds of retirement accounts to save up. Still, no matter what you choose, careful planning using retirement calculators and an accurate understanding of your spending will ensure a comfortable retirement.
How Much Money Do I Need To Retire at 50?
The amount you need to retire at 50 is unique — it depends on your lifestyle and typical expenses. If you live in a low cost of living area and plan to enjoy hobbies like bridge and gardening, your needs will likely be much lower than someone who lives in the heart of New York City or Los Angeles and wants to travel frequently.
Experts suggest several methods to estimate your financial needs in retirement, including what you need to retire at 50. Before getting into these details, consider your budget to understand what you will typically spend per month in retirement. You won’t be commuting, but you could see higher costs for hobbies and just about everything else due to inflation and additional medical care needs.
These are tried and tested formulas. However, remember that every method covered here is an estimate. Conservative investors may want to save more than calculators and retirement rules suggest.
Read more >>> How Much Do You Need to Retire?
The Rule of 25
The rule of 25 states you should save 25x your annual financial needs in retirement. If you know your monthly budget when you stop working, you can multiply it by 12 to get a yearly estimate and multiply that by 25 to get your “Rule of 25” savings goal.
If you retire at 50, your retirement investing strategy should include plenty of assets. However, if you keep the cash in savings, this approach could leave you bankrupt early in retirement, mainly if you live into your 90s or beyond.
According to the rule of 25, if you would like to receive $50,000 of annual income after you retire, you’ll need to save $1.25 million by age 50 ($50,000 x 25 = $1.25 million).
And how can you know that your $1.25 million won’t run out? The 25x rule has been a reliable one for retirement savers because of another rule called the 4% rule, which we’ll discuss next.
Read more >>> The 25x Rule for Early Retirement
The 4% Rule
The 4% rule states that you should be able to withdraw 4% annually from a retirement account and never run out of money. This math checks out if your investments always grow an average of 4% or more per year. However, you could run out if you invest poorly or draw too fast.
Many people consider this one of the more useful rules for early retirement. As long as 4% of your retirement account balance is enough to live on every year, you should be all set, according to this rule.
Some more aggressive investors suggest you can withdraw 5% per year. But the more you draw, the riskier your long-term investment strategy becomes.
Invest for retirement >>> Which Retirement Account Is Best? A Comparison of Plans
The Pros and Cons of Early Retirement
- Control over schedule: You have complete control over what you do and when in retirement.
- Financial independence: Once you have enough to retire, you’re not dependent on anyone else for money.
- Opportunities for side income: You might finally have time to work on a hobby or small business idea you’ve always dreamed of trying.
- Risk of running out of funds: When the money stops flowing in, the transition from growing your account balances to withdrawing from them can be jarring. If you spend too fast, you could run out of money.
- Less structure: Some early retirees find early retirement fun for a few weeks or months, then begin to feel their life isn’t as meaningful or purposeful.
- Fixed income: Most people must live on a strict monthly budget in retirement. This might be jarring for someone used to bringing home a regular paycheck.
How To Save Enough to Retire at 50
If you want to retire at 50 or any other age, the steps to save and invest are very similar. Here’s a roadmap for what you need to find out how much you need to do to retire at 50.
Determine Your Retirement Expenses and Timeframe
Start by estimating your costs and how long you’ll be in retirement. You can use your current monthly budget as a starting point and adjust it to fit your planned retirement needs. Remember that for retired Americans, healthcare can be a six-figure expense. Don’t underestimate your growing medical bills as you age.
You might want to downsize your home or pay off your mortgage, which could lead to monthly savings. Perhaps you want to travel and golf or take art classes, which add to your expenses. Once you have a good estimate, you can use your reasonable monthly and annual figures as a reference for your future financial needs.
Next, try to figure out how long you will live. While nobody likes to think of dying, it will eventually happen to all of us. You can use a life expectancy calculator to get an idea of how long you will hopefully live.
Use a Retirement Calculator
Retirement calculators guide you through the process of estimating your target minimum retirement account balance to retire with the parameters you set. Most allow you to enter your current savings, income, savings rate, expected rate of return, expected inflation rate, typically monthly spending, and expected age of retirement and death.
Consider Your Saving and Investing Options
Don’t just put your cash in a high-yield savings account for retirement. While a savings account is great for your emergency fund, most people are best off with a tax-advantaged retirement account that offers the ability to invest and save on taxes.
Individual Retirement Accounts (IRAs) and Roth IRAs are self-directed retirement accounts in most cases. You can save up to an annual limit.
Some early retirees use a Roth conversion ladder to minimize the taxes you pay on your retirement income. It works by converting a traditional IRA into a Roth IRA over a period of years to eventually have all your retirement savings in the Roth account. This can be beneficial because withdrawals from a Roth IRA are tax-free in retirement.
While you have a regular job, ensure you take advantage of employer-sponsored retirement plans. Accounts such as 401(k), 403(b), and 457 allow you to invest with pre-tax income and defer your taxes until your income is lower in retirement. Plus, many offer employer-matching to encourage saving for retirement, which is like free money.
Retiring early is a significant accomplishment. Many people approaching their planned retirement age don’t have enough to retire in their 50s or 70s, let alone at 50. However, early retirement could be within reach if you carefully manage your expenses and investments.
Get ready for retirement: