Editor’s note: "How to Retire at 50 or 55" is part three of an ongoing series focused on how to retire early and the FIRE movement. The introduction to the series is How to Retire Early in Six Steps. To see all early retirement articles, jump to the end.
In some ways, deciding when to retire is as much a philosophical question as a financial one. While the average retirement age is 62, your options vary from retiring extremely early to continuing work into later life. The "Financial Independence, Retire Early" (FIRE) movement has gained momentum as workers elect to power down their careers to pursue other passions. What path would make you happiest?
Let’s consult a philosopher.
Aristotle recommended finding a happy medium, or mean, between two extremes. For example, don’t exercise too much as to cause injury, but not enough will leave you out of shape.
His philosophy of finding a middle ground can be applied to the extremes of retirement planning: aggressively aiming for retirement in your 30s or 40s can impact your social life and lifestyle. On the flip side, being among the 20% of older adults in a recent AARP survey who say they have no retirement savings, potentially forcing them to work indefinitely.
For many, retiring by 50 offers a happy medium. It allows for a fulfilling career while still retiring early enough to enjoy your later years. Here are some steps to achieve this balanced approach to early retirement.
Determine how much you need to retire early by 50
Given an average U.S. lifespan is near 80, retirement starting at 50 could last 30 years or more. And since women generally live longer than men and typically earn less, they may need a different approach to retirement planning than men.
While personal circumstances vary, a common retirement planning guideline is to aim for 70-100% of your pre-retirement annual income to maintain your current lifestyle. So, if your income is $75,000 and you plan to retire at 50, aiming for a fund of about $2.25 million could be necessary (the math: 75,000 * 30 = 2,250,000), assuming you’ll need 100% of your pre-retirement income annually.
Try our online retirement calculator or consult a financial advisor for more precise planning.
You must also adjust your assumptions about a healthy withdrawal rate from your investment accounts during retirement. Although retirees may typically assume that a 4% withdrawal rate from their invested savings will ensure they won't outlive their money in retirement, a longer retirement means that early retirees need to update their rate in a FIRE scenario.
Maximize retirement savings
To retire by 50, you probably need to exceed ordinary savings rates.
A simple goal is to max out contributions to tax-advantaged retirement accounts like 401(k)s and IRAs to leverage tax benefits and compound growth. The 2024 limits are $23,000 for most employer plans and $7,000 for IRAs. You can also diversify your savings with brokerage and health savings accounts.
Your investment strategy should align with your income level. Higher earners may need less aggressive strategies, while lower earners might opt for a more aggressive, stock-heavy approach to compensate for fewer asset accumulation years.
Live well, but modestly
Retiring early at 50 doesn’t necessarily demand the extreme savings measures used by those who aim to leave the workforce in their 30s or 40s, but it does require careful spending. To maximize savings, consider opting for more modest vacations, homes and other significant purchases.
Redirecting the money saved from these choices towards your retirement funds can make a significant impact. For instance, buying used vehicles. As noted in “The Millionaire Next Door,” about a fifth of millionaires buy used cars, spending much less than average on their vehicles. spending less than 65% on their vehicles than their peers.
Another way to spend less? You could retire abroad before 55 in a country with a cheaper cost of living.
Look for additional income
If cutting costs doesn't boost your savings enough, try to increase your income (or try both strategies). Consider that in a 2018 TD Ameritrade FIRE survey, 61% of those who achieved financial independence had incomes of at least $100,000. Beyond striving for promotions and raises, explore passive income, side hustles or freelance work.
Plan for healthcare before medicare — and beyond
Medicare covers certain healthcare expenses but only becomes available when you turn 65. If you retire at 50, you’ll face a 15-year gap requiring alternative healthcare arrangements.
Options for coverage include continuing employer-provided insurance through COBRA (typically the priciest choice), purchasing a plan from the healthcare marketplace, joining a working spouse’s health plan, participating in a healthcare sharing program, or, though least advisable, going without insurance. Among these, enrolling in a spouse’s plan often proves most cost-effective, providing a bridge to Medicare eligibility without the high costs associated with other plans.
If you or your spouse have a Health Savings Account (HSA), consider maxing out your contributions while still employed. HSAs are powerful tax-advantaged tools you can employ to save for medical costs in retirement.
Unfortunately, you also have to think about health care after 65. Even though Medicare will kick in at that time, it won't cover all of your needs. One of the biggest conundrums for retirees is how to pay for long-term care. That's because Medicare doesn't cover long-term care expenses. A semi-private room in a skilled nursing care facility could run you over $100,000 a year, according to a recent study by Genworth. If, God forbid, you are seriously disabled or have dementia later in life, you may need this care.
Manage early retirement finances without Social Security
Social Security benefits for retirement are unavailable until at least age 62. Therefore, your savings will likely be the primary source of income during early retirement, which can be tricky. Traditional retirement accounts generally impose penalties for withdrawals before age 59 ½. Roth IRAs, however, allow penalty-free withdrawals of contributions anytime, provided the account has been open for five years, though earnings are restricted until age 59 ½.
This means you’ll likely need savings and investments outside of these plans you can tap, such as traditional savings or brokerage accounts. Just remember that selling investments may trigger capital gains taxes. Additional options like money market accounts, cash value life insurance or annuities could also supplement your early retirement finances.
Don't assume you will start Social Security benefits at age 62, however. In fact, one of your most important decisions in your early retirement planning will be when to file for Social Security. If you're married, you'll need to consider your spouse's lifespan and retirement income and when to take Social Security relative to their retirement timeline.
Don't forget estate planning
You're working hard and saving to be able to retire early, but remember that estate planning is also an important part of your preparations. You can get a basic estate plan in place while you're working and then put a more detailed plan in place once you are retired and have time to focus. If you are concerned about the expense, there are ways to save money on estate planning.
Estate planning for women should consider the average longer lifespans and more frequent work interruptions women experience. And if you are wealthy, estate planning for millionaires should also consider specific issues, such as special trusts and tax management.
How to retire at 55
If you find retiring early by 50 challenging, consider aiming for 55 instead, which offers additional benefits.
At age 50 and later, you can make catch-up contributions to your retirement accounts, allowing you to save an additional $7,500 in a 401(k) and $1,000 in an IRA.
Additionally, the IRS rule of 55 provides an opportunity to withdraw funds from your current 401(k) or 403(b) without penalty if you're laid off, fired or quit your job in the year you turn 55. This doesn't apply to former employers' 401(k)s, unless they’re rolled into your current plan.
Moreover, if you’re eligible for a pension, delaying retirement to 55 might help you meet certain criteria needed to maximize your pension benefits.
For high-wealth singles or couples who do not qualify for a Roth IRA, consider a backdoor Roth IRA for its ability to earn tax-free income. Approach this option cautiously, however, as there are limitations and the tax code may change.
With these advantages, opting to retire at 55 could be a practical compromise for retiring early. Or, as Aristotle might call it, a nice, happy medium.
Read More About Early Retirement
- How to Retire Early in Six Steps
- How to Retire at 40
- Retire Abroad Before 55
- Will Retiring Early Make You Happier? It's Complicated
- Early Retirement Withdrawal Strategies for the Long Haul
- Five Early Retirement Mistakes to Avoid
- The Rule of 55: One Way to Fund Early Retirement
- A Sabbatical May Be a Smarter Move Than Early Retirement
- How SEPP 72(t) Can Help You Retire Early and Dodge Penalties
- Retire Early for Adventure: Go Travel and Volunteer
