How to Retire by 50
If you’ve read many of the posts on our website or seen many of my YouTube videos, then you can probably tell that I like getting into the details.
One of the fascinating things about finance to me is that you can literally project nearly any outcome with a relatively high degree of certainty (assuming your inputs are right).
There are simple formulas for calculating a number of helpful things like how quickly your money will grow or shrink, how inflation will impact a portfolio, the value of one investment over another, the impact of taxes on your net worth, and so on.
It’s all math and the math don’t lie.
Other things in life, though? Well, let’s just say they can be more difficult to plan.
Things like our personal health, headaches with career, legislative and political issues, how our kids will turn out, and world peace or the lack thereof are just a handful of examples, and all are difficult to forecast.
But not money.
And because finances are so simple to project, we can make substantial plans for our money and how we’ll use it.
Among the most popular financial events to plan for is retirement and for most people the optimal retirement date is ASAP.
Facts About Retirement
Now, it’s a bit unusual for me to write about early retirement.
It’s not that I think there’s anything wrong with it, I just prefer to emphasize financial independence over a retirement date.
I do this because I believe most people who want to retire early are less interested in quitting a job than they are in being in control of their time.
It’s not so much that they don’t want to work as it is that they want to control that decision.
In fact, most of the people I know who have “retired” early end up engaging in other interests that make them even busier than they were before they closed the door on their primary professional career.
I don’t tend to see this as retirement as much as a transition from the work they had to do, over to the work they really want to do.
Call it an “encore” career or a “new chapter”, but retirement doesn’t seem accurate to me.
Anyhow, semantics aside, reaching this level of financial independence is a noble pursuit and I see a lot of wisdom in wanting to reach it as quickly as possible.
For the average American male, retirement begins at age 64 years, 8 months, and for females, it begins at age 62 and 1 month.
Since mortality in the United States will carry the average man to age 73.5 and the average woman to 79 and 4 months, that gives us 8.8 and 17.2 years of retirement respectively (yes, women get exactly twice as long in retirement).
You can do a lot in 8.8 to 17.2 years, especially if you have money and no need to work any longer, but what if you could extend that a bit by retiring earlier?
But how much earlier? It would be a bit cumbersome to cover more than one retirement age in a single post and as I started research for this post, I wasn’t sure if I should use 55 or 50 as a goal.
Only 2% of people retire before age 50 and just 6% by age 55. Clearly, neither option is likely for most of us, so I picked 50 because it sounds more appealing.
The Path to Retirement by 50
So, how can we retire by 50?
Meeting the financial requirements necessary for retirement are painfully simple to state and very difficult to achieve.
All you need is enough income to cover your expenses. Oh, and you need to do that without needing to work.
There are two key ways most Americans acquire income in retirement:
1) They have regular income either as a benefit from their working years or through an annuity purchased from income earned during their working years. Social security is easily the most common source of this regular income, though defined benefit pension plans would also be included.
2) They pull monetary needs from their “pile of money” (savings and investments) that was accumulated during their working years. Basically, any money that they’ve saved that makes it to retirement serves as a lump sum of money from which they can withdraw on an as needed basis, though most of this has been building in a tax-advantaged retirement plan.
I will touch on pensions, annuities, social security, and other regular income a little below as we talk about evaluating your spending needs, but in our mathematical examples, I will leave these income sources out of the equation because they are different for everyone.
So, let’s talk about how to build that pile of money.
Step 1: The Nest Egg
The first thing you need to know when you set out to build retirement savings is to know approximately how much you’ll need.
You may have heard this referred to as a “nest egg” or “your number” (that is, the number you need to reach in order to fund your retirement).
Since I am afraid of birds, I’ll just refer to this as “your number”.
Typically, the easiest way to calculate your number is to use the 4% rule.
The 4% rule came from a study that was done by three professors in the late 90s at Trinity University. Their goal was to identify a safe withdrawal rate from a diversified portfolio of stocks and bonds that would last a retiree for 30 years.
They came up with 4%.
The nice thing about having a safe withdrawal rate is that we can use it to calculate our “number” if we know how much we need to withdraw.
Simply divide your annual retirement spending by 4% or multiply it by 25 (the reciprocal of 4%) to calculate your number from which you will make your 4% withdrawals.
For example, if you expect to spend $100,000 annually in retirement, you’ll need $2.5 million to cover that at a 4% withdrawal rate.
Of course, this has led us to another question. What will my expenses be in retirement?
We will cover that in a minute. First, there is another major issue we need to address.
The 4% rule was built for a 30-year retirement. If you retire at 50, there is a decent chance you will die before you reach 80 and a 30-year window is no problem.
But what if you don’t die that soon? (I assume you’re okay with the scenario, btw.)
It is not at all uncommon to live well past 80 these days. If you have been withdrawing 4% of your portfolio for 30 years, there’s a pretty decent shot that you’ll run out of money before you pass away.
That is not a great scenario.
To account for this, you should plan for a lower withdrawal rate.
This can be accomplished by either reducing the amount you pull from your number or you can just increase your number.
Either way, for a retirement beginning at age 50, I’d recommend using 3% as a safe withdrawal rate, which is what we will do for the remainder of this scenario.
So, the same $100,000 of annual expenses will now require a $3 million ($100k x 30) portfolio of assets instead of $2.5 million.
*I know there will inevitably be some people who are convinced the 4% rule is inaccurate and should be ignored with great prejudice. The truth is it is a helpful tool for making an approximation, which is what we have to do with an unlimited audience. This method is widely used by financial planners across the country for develop approximate withdrawal rates for retirees.
Step 2: Estimating Retirement Expenses
So, how do we calculate the amount we’ll need?
Naturally, the further you are from retirement, the more challenging this may be.
You might as well go ahead and get used to the fact that you’re never going to hit the mark perfectly here. There are too many variables in your own life, not to mention the impact the rest of the world at large will have.
But you need to try.
The best way to do this is to start with your annual expenses now and reduce or increase them by the value of any significant expenses you expect that you won’t have in retirement.
For example, will you still have a mortgage or other debt? Will your kids still be at home? Will you travel more? Will you live in a lower or higher cost-of-living area?
Adjust your expense expectations accordingly as you walk through this self-analysis.
Next, you should subtract any regular and dependable source of income you expect to have in retirement because they will help offset your expenses.
As you do this, bear in mind that most pensions do not begin until full retirement age or they come with a reduced benefit. This includes Social Security.
Speaking of which, it’s up to you, but since our topic is “how to retire by 50”, I would leave Social Security out of your math.
It’s not that I think the program will disappear completely. But, I do suspect that we will eventually reach a point of means testing, where those with the “means” will receive little or no benefit because they have savings of their own.
Even if it is around, if you retire at 50, you’ll have a minimum of 12 years before you can begin claiming a reduced benefit and even longer for full benefits.
Once you have subtracted any regular income from your expenses, the remainder is the amount of money you’ll need each year to finance your retirement (assuming you calculated this on an annual basis).
Now, multiply that annual number by 33.3 or divide it by 0.03 to get “your number”.
If you want to be more conservative, select a lower withdrawal rate like 2.5% (multiply by 40) or 2% (multiply by 50).
What About Inflation?
I am often asked why I don’t include inflation in these calculations.
It’s not that inflation doesn’t matter. Trust me, it absolutely matters. Inflation is one of the more unsettling forces in making retirement projections.
However, I don’t include it in my posts or videos for two key reasons:
1) In my opinion, it’s easier to focus on a savings rate as a percentage of income (like 15% – 25%) and just hold that rate throughout your saving years than it is to account for inflation every time you recalibrate, only to find that your income is rising at an equal or greater rate than inflation anyway. (No, this isn’t always the case, but how could I address those specifics through a website?)
2) It is challenging to conceptualize the value of dollars years down the road.
For example, do you know how much you need to have saved to preserve the buying power of $1 today if it inflates at 3% a year for 10 years?
It’s more than $1.30.
Or do you know how much you need for $2.5 million to cover the same ground in 20 years at the same inflation rate?
Probably not without a calculator. And that’s exactly why I don’t bother adding more confusing math to what is already getting quite a bit complicated.
Additionally, inflated numbers look inflated. Seeing how much more you’ll need due to the dollar-weakening effects of inflation can sap your motivation.
Case in point, you’d need $1.34 in 10 years to cover $1 today with 3% inflation. You’d need $4.5 million to cover the buying power of $2.5 million in 20 years. Sounds a lot harder doesn’t it?
So, How Do I Retire By 50?
Obviously, I don’t know every reader’s projected retirement expenses at age 50, so I’ll have to make a guess based on the average person.
Median household income in the United States is $74,580. To keep things a little easier, we’re just going to say $75,000.
We’re also going to assume this very average person will spend 80% of this annually in retirement, which brings us to an annual need of $60,000.
Using the 3% safe withdrawal rate I recommended earlier for a 50-year-old retiree, we can easily calculate that this person would need to save $1.8 million by the time they reach 50.
That is no small task, but let’s see how one would get there…
We’ll assume this person started saving in earnest at age 25 and saved the same percentage of income for 25 years.
Finally, we’ll assume an aggressive 10% rate of return* since this is an aggressive schedule.
For more on the math to calculate our savings rate, read our post about checking to see if you’re on track for retirement or watch the YouTube version here.
Using this formula…
FV = PMT × ((1+r)^n−1)/r x (1+r)
we calculate that we need…
$1,800,000 = PMT x ((1+10%)^25-1)/10% x (1 + 10%)
Or…
PMT = ((1+10%)^25-1)/10% x (1 + 10%)/$1,800,000
Which means…
PMT = $16,638.66
Which is 22.185% of $75,000.
So, in this scenario, in order to retire in 25 years (by 50), one needs to save 22.185% of their income.
I also produced another post and video in which I ran the same math for a variety of retirement horizons if you want to skip the calculations yourself and just read it from a chart.
Now, I don’t know if you expect that a 22% savings rate would be enough to get one to an early retirement. Personally, I was expecting it to be higher.
Clearly, compounding interest plays a role here, which is just another way of saying this imaginary retiree benefited from the time he or she was invested.
(*10% is actually less than the average return for an S&P 500 index fund over the last 70-plus years, so it’s not as if 10% is that wild.)
Wrap Up
Keep in mind that in order to provide this example to you I had to make a lot of assumptions. None of this is meant to be financial advice.
I do hope it was educational, but your personal outcomes will depend heavily upon your own personal situation.
Also, when I started this post, I mentioned that the math don’t lie.
There are only a few ways to pull your retirement up. You can spend less, save more, or earn better returns.
It is much easier to control your spending and savings rate, so I’d focus there.
If you are a little further down the road and this feels a bit impossible, don’t sulk about it. You can’t change the past but you can avoid any further delay by getting started now if you haven’t already.
If you wait, you’ll eventually have the same feeling again, you’ll just be older. Might as well get going.
