By Matthew Theal, CFP®
The number one reason our clients give for wanting to retire is freedom. No more getting up early. No more pointless meetings. No more being yelled at by a boss you can’t stand. When you retire, you become free from the day-to-day grind of the rat race in America.
Today most people retire in their 60s, with the average somewhere around 65. Is it possible to retire before then? Maybe 55? How about 50?
How can you achieve retirement at age 50? A full 15 years before the rest of your age group?
Early Retirement Risks
Retiring at 50 is possible, but you face risks in early retirement that you should consider before you decide this is a path you want to go down.
The first significant risk is the cost of health care. For most people reading this, your employer’s plan subsidizes your health care. When you stop working, you will need to budget upward of $500 or more per person in your household for health care. Assuming you retire at 50, you will have to cover 15 years of health coverage before you are allowed on Medicare, which starts at age 65.
After health expenses, you need to factor in that if you retire early, your Social Security benefit will be less than it would be had you kept working. Your Social Security benefit is based on an average of your highest 35 years, so if you don’t have 35 years of high earnings, your benefits will be reduced.
If you stop working before you get to 35 working years, you will get a 0 for each of the remaining years until you hit 35 years. Ideally, you will have 35 years of working experience, making the maximum Social Security wage base. If you are retiring before 50, that will not be the case.
One risk that many people don’t think of is stock market risk. Everything is fine in a portfolio when you are withdrawing money when the market does well. However, we know that, generally, 25% of the time, or 1 in every 4 years, the stock market will decline. When that happens, you don’t want to be withdrawing so much principal that it becomes difficult to make up what you lost.
Finally, and most importantly, the most significant risk in early retirement is boredom. What are you going to do if you retire at 50? Sitting on the couch watching Netflix and Fox News is a great way to kill ourselves slowly. In fact, some studies have found that people who retire early end up going back to work due to boredom.
If you think you can manage the risks of earlier retirement and I haven’t convinced you it’s a bad idea, then read on.
Work Hard and Create Value
If you are planning on retiring 10 to 15 years before most people your age, you are going to need to have worked hard or created economic value.
If you are working for somebody else, like a large corporation or a small business, you will have to put in the extra time. There will be no early retirement for the person who is working fewer than 40 hours a week and isn’t aggressively going after pay raises or skill development. Working overtime and pursuing salary increases could help lead to retirement by 50.
If you are more entrepreneurially minded, you could have a much easier path to earlier retirement. For instance, you could start a company that not only gives you the income you need to have a nice lifestyle but also pays for your retirement when you decide to sell the business!
However, I would argue that a person with the itch to start a successful business probably doesn’t have the personality type that would retire early! That entrepreneur would get bored and start another business.
Either way you slice it, you will need to go on the offensive to retire early.
Save, Invest, and Compound
Most people who want to retire comfortably need to save at least somewhere around 10 to 20% of their income. If you are trying to retire early, you are going to need to save somewhere between 20 and 50% of your income! You might need to save even more depending on how much money you will need in retirement.
Simply saving and stashing that money in a bank account isn’t enough to stay on track for retirement. You will have to invest your savings in a portfolio of stocks and bonds. The reason? Your money will compound more if you are earning 7–9% a year compared with 1–2%.
Let’s take the example of a person who invests $100,000 for 30 years. After 30 years, if they earn 2% a year, they will have $181,136. Their money has not doubled. If they invested in a portfolio of stocks and bonds that earns on average 8% per year, they would end up with $1,006,266!
Lump sum compounding won’t be enough. You will also need to start saving earlier in life.
Don’t believe me? Check out this compounding magic! Let’s assume a person starts saving just $10,000 a year at 20 years old and continues to save that much per year for 30 years (until age 50) while getting an 8% average return on their money. This person will end up with $1,324,000 at age 50!
That’s $300,000 more than the person from the above example who did a lump sum $100,000 investment for 30 years!
Keep Expenses Low
You will need to be frugal—not FIRE movement frugal but thrifty.
When you go to buy a house, buy one you can comfortably afford, not the home that is slightly out of the budget that you will “grow into,” as the realtors love to say. Instead of buying a Mercedes, purchase a Kia.
Decide what you plan to pay for your children. Today way too many parents are supporting their children into their mid-20s or early 30s. Unless you are incredibly wealthy, you will have to let your children sink or swim sooner rather than later.
Finally, I’m not one of those financial planners who’s going to tell you to cut the latte habit. Those kinds of minuscule penny-pinching strategies are hogwash. The key to early retirement is keeping the large expenses like housing and auto low to nonexistent and having a plan for how you will deal with your children as they transition to adulthood.
On paper, retiring early probably sounds like a great idea, but you face a lot of risks. One question to consider is, have you ever stopped to think why you want to retire early?
I’m not a psychologist, but the answer most likely has to do with two things: (1) You are extremely lazy, or (2) you hate your job or career choice.
If you are number one, there’s no helping you.
But if you are number two, consider finding a line of work that brings happiness to your life—even if it means making less money at the start. Take it from me, I’m blessed every day to go to work with two of my closest friends! Try to find that before you consider early retirement.
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