Traditionally, retirement age has been around 65 — or even higher. By the standards of the Social Security Administration, 67 is now considered “full retirement age” for those born in 1960 or later. But a growing number of Americans in the “financial independence, retire early” movement, also known as FIRE, are targeting much more aggressive retirement ages — in some cases 50, or even earlier.
It’s certainly possible to retire this early, but if you realistically want to reach that goal, you’ll have to make some dramatic life changes as early as possible. You’ll also have to factor in some variables that aren’t as important if you retire at, say, 67 instead. Here are the most important steps you’ll need to take.
Plan Out Your Future Income Needs
It’s hard to know exactly how much you’ll spend in retirement, or how much inflation will increase costs by the time you get there. Nevertheless, the first step in planning out an early retirement is to project your future income needs.
One way to start is to simply take the amount you’re currently spending annually and multiply it by the number of years you expect to live in retirement. You can get estimates of this data from actuarial tables, such as the ones provided by the IRS in relation to mandatory distributions from IRAs.
You can tinker with this model by adding a 3% inflation rate to your projections and by adding or subtracting expenses you anticipate you will incur after you retire as opposed to during your working life.
Project How Much Income You Will Need To Cover Your Future Expenses
Once you’ve got a ballpark as to how much retirement will cost you, you can reverse engineer how much you’ll need to save to cover those expenses.
The bottom line is that if you want to retire at age 50, you’ll need to generate enough income and savings to cover all of the costs of your long retirement. Once you’ve got those two numbers — how much you’ll need in retirement and how much you’ll need to save to get there — you can start your plan.
Eliminate Your Debt
It almost goes without saying that if you want to retire early, you’ll have to eliminate your debt as soon as possible. If you’re paying credit card interest every month, the drain on your cash flow is likely to be too large to fund a savings and investment plan that can provide for an early retirement.
Boost Your Income
Retiring at age 50 means you’ll be out of the workforce right about the age when most people hit their peak earning years. This means that instead of working 10 to 15 years earning top dollar, you’ll already be retired.
To make that tradeoff, you’ll have to accelerate your earnings cycle much younger in your life. You can accomplish this in a number of ways. The best option is to build a career in a high-paying industry, or being willing to change into one. Other ways to boost income include asking for yearly raises and generating side income through gig work or even your own business.
Save as Aggressively as Possible
The simple mathematical truth is that unless you save and invest far in excess of traditional models, you won’t reach your retirement goals by age 50. While most advisors recommend you tuck away 10% or so of your income into a retirement account, if you want to retire at age 50, that number will have to be closer to 50% or more, depending on your income.
A simple mathematical example can highlight this difference. Imagine you’re on a traditional retirement plan, socking away $400 per month starting at age 25 and planning on retiring 40 years later, at age 65. If you earn 10% annually on your money, you’ll have about $2.5 million by the time you retire. But if you retire at 50 instead, this savings plan will only generate about $530,000, or one-fifth as much. To reach $2.5 million by age 50, you’ll need to save closer to $1,900 per month instead.
Make Spending Cuts
You can’t realistically retire at age 50 unless you forgo a lot of the traditional spending that comes along with being 20, 30 or even 40. In other words, to reach your goal, you’ll have to significantly reduce your discretionary spending now so that you can enjoy that money later.
This can be the trickiest part of saving for an early retirement, as it means you’ll have to say “no” to a lot of things, from eating dinners out with your friends to going on regular vacations. You might also have to change where you shop, from where you get your groceries to the clothing stores you patronize. Retiring at age 50 means the majority of your income will have to go to savings, and to accomplish this, you’ll need to make aggressive spending cuts.
Things To Remember
One of the things that those planning on early retirement often overlook is the mathematics of time and age. For example, while a $2.5 million nest egg may very well provide you with a healthy retirement at age 65, at age 50, that money will have to last for an additional 15 years. This dramatically reduces the quality of life you’ll enjoy in your retirement.
Another factor to consider is that if you retire early, a lot of the safeguards in place for retirees won’t yet apply to you. For example, you won’t be eligible for Medicare for 15 years if you retire at age 50, meaning you’ll have to cover the cost of health insurance in the meantime. You also won’t have access to Social Security for at least 12 years. These are the types of ancillary issues that you must factor into an early retirement plan.
