Retirement represents a landmark in your life's trajectory, a moment when you can look back on a lifetime of hard work and enjoy the fruits of your labor in the golden years to come. For many individuals, entering into retirement gracefully requires decades of careful financial planning and strategy.
The earlier you plan on retiring, the savvier you will have to be in your efforts to stockpile enough wealth to ensure that you don't run out of money over the next several decades. As an example, individuals who are hoping to retire at 50 will be forced to confront a variety of challenges that individuals who will be retiring closer to 70 will likely be able to avoid. With that in mind, there are specific strategies you can employ in order to ensure that your early retirement plan is as successful as the plans of those retiring well past this point. Fortunately, getting started with an effective retirement plan isn't overly difficult.
In order to retire at 50, you will need to carefully evaluate your required annual income, your current savings and any retirement programs you have been contributing to.
The Basics of Retiring at 50
When you begin planning your retirement strategy, the first question you should be asking yourself is, "How much money am I going to need to live comfortably?" There is no "right" answer to this question. Some individuals are comfortable with significantly less with respect to material possessions and lifestyle choices than others. It is important, however, to be very honest with yourself during this phase of your planning. False modesty could lead you to underestimate the amount of money you will need during your retirement, which can result in serious financial hardship over time. Once you have come up with an estimated annual income that you are certain could comfortably cover your expenses (including an additional financial cushion for unexpected costs and hardships), multiply this sum by 35. Given the fact that the annual average life expectancy for US citizens is 78.7 years, this estimate will provide you with a very comfortable cushion in the event that you spend more money than you anticipated early on during retirement.
Once you have determined how much money you will need to satisfy your lifestyle requirements, your next step should be to determine how you will acquire these funds and how close you currently are to saving this particular sum of money. It is at this phase of your planning that you should begin exploring various retirement programs available today, including employer-sponsored pension plans and individual retirement accounts, or IRAs. For example, if you are currently contributing to an employer pension plan, you may be able to benefit from regular monthly payments that are sourced from the recurring pension contributions you and/or your employer made throughout your working years.
Consulting With Your Employer
Of course, it is important to note that standard employer-based pension plans are typically designed around the idea that an individual will not retire early at 50. With that in mind, you may not be able to benefit from these programs on an equitable level to individuals who continue their pension contributions for an additional 15 years. That being said, the only way to determine precisely how your employer-sponsored pension plan can benefit you during retirement is to speak directly with a member of your employer's human resources department or with a plan administrator. These individuals will likely be able to provide you with a comprehensive overview of your current pension plan and the steps you need to take to achieve your financial goals.
Retiring at 50 With an IRA
An individual retirement account, or IRA, is yet another powerful retirement tool that can help sustain your finances once you leave the workforce. Unlike employer-sponsored pension plans, which require the full cooperation of your employer, an IRA can be started by individuals whose employment situation is more liquid. In fact, individuals do not need to be employed at all to begin depositing funds in an IRA. Depending on the specific type of IRA you choose, the funds you contribute will either be pre-tax or post-tax. In a Roth IRA, individuals contribute post-tax income to the account, which then allows them to withdraw these funds tax-free during their retirement. In a traditional IRA account, individuals do not pay tax when they contribute funds. However, these funds will be taxed when they are eventually withdrawn during retirement.
Exploring Maximum Annual Contribution Limits
Both the traditional and Roth IRAs feature maximum annual contribution limits. For tax year 2019, contribution limits will be set at $6,000 per year. It is also important to note that individuals earning over a specified amount of income annually will be ineligible to contribute to a Roth IRA. For tax year 2019, single filers cannot earn more than $122,000, while married couples filing jointly cannot earn more than $193,000.
Perhaps one of the more advantageous elements of an IRA is that individuals who do choose to retire at 50 can continue to contribute to their IRA until reaching their preferred withdrawal period. This adds an excellent degree of flexibility for those who may be leaving the workforce at 50 but are still hoping to actively generate income. Keep in mind, however, that there are penalties associated with early withdrawals from IRA account. Generally speaking, individuals cannot begin taking money from their IRA prior to the age of 59 1/2 unless they are willing to pay a significant penalty.
Waiting For Social Security
Assuming you have paid into the Social Security program throughout your years in the workforce, you will be able to access these funds beginning at the age of 62. However, even if you do begin withdrawing your Social Security at 62, which is the earliest date possible to do so, you won't get the full amount of your benefits. Full Social Security benefits will be available beginning at age 67 for those born after 1960. With these ideas in mind, it is essential that individuals have some form of income or reserve funding available when retiring at 50. Regardless of your contributions to retirement programs, the earliest you will be able to access any of this funding without incurring penalties is nearly a decade after your retirement date.
Because of these retirement plan restrictions, it is all the more important that individuals planning on retiring at 50 calculate their estimated annual expenses well in advance of their retirement date and actively plan for this point in the future. Given the fact that 50-year-old retirees will be forced to wait almost a decade before receiving any form of IRA or Social Security retirement benefits, there truly is a need for careful, accurate planning.
For those who remain committed to the idea of retiring at 50, perhaps the best possible "first step" is to consult with a retirement professional. These individuals can help you map a trajectory to your retirement and illustrate where you are, progress-wise, on this path. They may be able to suggest some alternatives, such as stock trades or real estate investment options. Although it may be frustrating, individuals should also prepare to adjust their retirement expectations based on these assessments. It is far better to continue working a few additional years to accrue the finances you need rather than dropping out of the workforce and suffering the stress and insecurity of financial hardship at an undetermined point in the future.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.