The definition of retirement has long been evolving, and the days of working to 65 and collecting a pension are a thing of the past. In fact, an early retirement is becoming more of the norm as the average age has dropped to about 62. While the thought of retiring by 50 may seem like a pipe dream, it can be attained with proper planning.

A key component of this goal is defining the word “retirement.” For many, that means never working again. For others, it involves volunteering, working a part-time job, or starting a business. These retirees essentially want more freedom. Determining the type of retirement you want is important when answering the question of “How much do I need?”

Typically, people spend between 60% and 100% of their pre-retirement income depending on lifestyle goals and fixed expenses (e.g., mortgage, car loans). This percentage is likely to change as you age because it is typical to spend more in the earlier years and less later, barring any major health care expenses (more on that below).

With the advent of the internet, investing is easier than ever as we can access information at the tips of our fingers. Using a retirement calculator is a good starting point to get a ballpark figure of how much you may need. Working with a financial advisor can give you more specific numbers.

There are several things to consider in making this dream of retiring by 50 become a reality.

Budget

With personal finance, the first and most crucial step is creating a budget. Having enough to retire at 50 requires discipline and emphasizes saving early to build a large enough nest egg. Developing a sound financial plan will assist in making decisions when presented with various financial changes, for example:

Receiving a bonus: Save at least 50% of your net take-home amount.
Receiving a salary increase/promotion: Allocate 75% of your net increase toward investments.
Paying off a liability (e.g., car or student loan): Save 100% toward investments as this was already “accounted” for.

Having the ability to consistently follow through is harder than it seems. It’s always tempting to take that extra vacation or complete a major home renovation. But if you have a very early retirement goal, then that money would likely be better off in an investment portfolio to grow and be used for retirement expenses in the future.

Debt

One of the keys to retiring early involves being debt-free, especially consumer-debt-free. Not all debt is “bad” (e.g., mortgage), but if you want to retire by 50, it is advisable to avoid large fixed expenses when possible as they can chip away at your investment principal. This really holds true during market downturns as you could be a forced seller of investments at inopportune times, which can impact your long-term investment returns.

Having access to a home equity line of credit (HELOC) would be considered a “good” type of debt when used properly. A HELOC provides access to funds in a flexible and tax-efficient manner and can be drawn upon as needed. This can come in handy during periods of market volatility and can help minimize your tax bill. The best part is you are only required to make interest payments on any amounts borrowed.

Account Access

In retiring early, one of your best friends is time. Starting your efforts early provides additional years to save and the benefit of compounding growth. Saving into a retirement plan [401(k), Thrift Savings Plan, etc.] is recommended as it not only provides tax-deferred growth but typically an employer match.

While retirement fund savings are important, most withdrawals from retirement accounts before age 59.5 are assessed a 10% penalty. To avoid penalties and bridge the gap to age 59.5, you have options (some limited options are outside the scope of this article and should be discussed with a qualified financial planner and accountant). Your options include:

Focus on investing in liquid vehicles such as a taxable investment account.
Review your principal contributions in your Roth IRA for withdrawal eligibility.
Consider your eligibility for Substantially Equal Periodic Payments (SEPP).

Taxes

Predicting future tax rates is never easy. To help combat this fact, you should try to diversify the types of accounts you use to fund your retirement savings. Having a mix of tax-deferred, tax-free, and taxable accounts will give you more options to take tax-efficient withdrawals in the future.

Inflation

One area often overlooked when planning for an early retirement is inflation. This rate affects how much your investment dollars will be worth. When calculating how much money is “needed” to retire, factoring in inflation is a must.

We have been fortunate that inflation has been relatively muted for the last decade. It hasn’t been this low since the 1950s, which was followed by three decades of higher levels. If we experience something similar going forward and this is not accounted for, you could be forced to make significant retirement lifestyle changes.

While the impact might seem minimal in a single year, the full impact is felt over the long term. A model constructed by LIMRA Secure Retirement Institute illustrates how a fixed income of $1,341 per month would lose $117,553 of “value,” assuming 3% inflation over 20 years!

Many bond and cash yields are currently below 1%. If inflation reaches its historical average of 3.15%, it could be troublesome. Since inflation is not static, regularly revisiting your portfolio’s composition and inflation-adjusted return is recommended.

Health Insurance

Perhaps the biggest wild card in retiring at age 50 is health care. Medicare does not start until age 65, so retiring early means you will likely need to secure medical insurance on your own.

According to a report conducted by HealthView Services, a 65-year-old married couple can expect to spend about $387,000 during retirement on health care costs, not including potential long-term care expenses!

The national average premium for a 50-year-old married couple is approximately $14,000 per year. The good news is, with proper planning, you could qualify for health insurance tax credits, which could significantly reduce your outlay for coverage.

However one defines “retirement,” achieving it requires hard work and dedication. A well-built and evolving financial plan can help protect and shield you from the full brunt of any obstacle you may encounter.

Our Bethesda, MD financial planning firm understands that everyone’s situation is unique. That’s why we suggest you work with a financial advisor who can help you create a financial plan that will assist you in making the best and most comfortable decision based on your financial goals and desires.

Discuss your situation with a fee-only financial advisor.

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