Between the demands of jobs and other daily responsibilities, many of us have very little time to unwind in 40 years of working life. 

This is why many people choose to retire early: to enjoy their hard-earned money and spend more time with their loved ones while they’re still active and energetic.

Saving for early retirement can be a challenge because you have less time to do it.  But with dedication and careful planning, it isn’t impossible to achieve.

How much do I need to retire at 50? There’s no one-size-fits-all answer. To find out, you’ll need to do the math.

Start With Your Target Amount

Decide how you want to spend your days in retirement. What would a normal month look like? If you’d like to maintain your current lifestyle, a good rule of thumb is to have 80% of your pre-retirement income available to use for each month in retirement.

First, look at your current and future income sources. How will you fund your retirement? Keep in mind that many federal subsidies, like Medicare, won’t be accessible until you reach 65.

Here are some channels you should be looking at:

  • Salary or Business Income
  • Pension Income (401(k))
  • Retirement Account Income (IRA)
  • Social Security Income

Map out how much money will be available to you in each year of retirement. This will give you a baseline for your budget.

Next, forecast your expenses. You can expect that healthcare costs will increase as you age. Meanwhile, the cost of certain work-related expenses including daily transportation, clothing, payroll, and income taxes may decrease.

Create a speculative monthly budget based on your expense forecast. We recommend adding 15% to your projection so you have some wiggle room to cover unanticipated expenses.

Multiply your budgeted amount by 12 to get the amount you’ll need for each year. Then, assuming you’ll live 35 years in retirement, multiply your yearly expenses by 35 to get your target amount.

Once you’ve determined your target amount, you can start working towards your early retirement goal. Here are a few tips to help keep you on track.

Accelerate Your Savings 

A person retiring in their sixties usually puts at least 15% of their income towards retirement savings. If you’d like to retire early, you’ll need to save more, faster.

Many early retirees adopt aggressive savings strategies to meet their goal. This can mean living on only 25% of your income and saving the rest, or cutting all unnecessary expenses while you contribute to your retirement savings. 

Making drastic changes to your current budget will leave you with more money to put towards savings and help you develop the discipline you need to live well within your means in retirement. If you structure your budget this way, you’ll already be used to living on it even after your regular income gets reduced due to retirement. 

If you have the bandwidth, you may want to take on additional jobs or start a business to grow your funds even faster. 

You can store some of your income in high-yield savings accounts, which can offer interest rates of up to 1% each year—10% higher than rates offered by traditional savings accounts. This is a great way to maximize growth on your liquid funds.

It’s also a good idea to set up retirement savings accounts like an IRA or 401(k) as early as possible. This is a great way to get tax-advantaged growth on your funds. To enjoy the full benefit of these accounts, you should make the maximum allowed contribution every year.

Maxing out your 401(k) contributions will give you an even better return if your employer offers a matching contribution benefit. Your savings will grow two times faster at no extra expense!

Man sitting on coins
Photo by Mathieu Stern on Unsplash

Invest in Diverse Assets

Assume that your cost of living will inflate by 7% every year, and that you’ll live in retirement for about 35 years. Setting up investments will grow the value of your funds above inflation, and keep you on track with your financial plan.

Here’s a widely used rule of thumb for segmenting your portfolio: subtract your age from 110 to get the percent you should have invested in stocks. The remaining percentage should be invested in less risky instruments. Following this rule, your portfolio allocation should change every year as you age.

Why does this work? Investing in stocks can grow your money faster, with greater returns. However, the market is very volatile, leaving investors at risk of major capital loss.

Because earned income is your primary source of funds when you’re younger, you won’t need to rely on investments for most of your income. You can invest more of your money in stocks because you have time to bounce back from any losses.

As you age, your investment portfolio becomes a bigger part of your total wealth. You’ll need to ensure steady capital growth to replace your salary after you retire. You can do this by putting more of your money into moderate investments like bonds or mutual funds, which can earn you decent returns while lessening your exposure to risk.

You can also get tax-free growth on your funds by setting up a flexible life insurance policy. Some plans provide living benefits that can help you during your retirement years.

Eliminate Debt

Retaining bad debt such as mortgages, auto loans, or student loans will increase your cost of living in retirement. Monthly payments and interest fees can take a huge cut of your monthly budget and become a major source of stress.

Debt is also an inflexible expense, which means that you can’t dip into this part of your budget when you’re in a financial bind. It’s a crippling weight to carry when you have no earned income to rely on.

Pay off as much of your debt as possible before you retire. This goal should be factored into your retirement savings plan.

Track Your Progress

Planning for an early retirement requires a lot of discipline. Tracking your progress on a spreadsheet lets you see how much your funds are growing, keeping you motivated as you work towards your goal. 

Revisit your retirement plan twice a year to make sure you’re on track. Remember that your plan isn’t set in stone and can change to reflect your capabilities and circumstances.

The Bottom Line

Achieving early retirement is an ambitious goal, but it’s definitely possible. Start implementing your financial plan and the discipline will follow. Retiring early will allow you to take back time to enjoy life with those closest to you.

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