With careful planning and self-discipline, you may be able to retire earlier than the norm. While many people may be postponing retirement to later and later ages, early retirement is still within reach for many who may not even know it. If retirement by the age of 50 is your goal, there are steps you can take and problems you should avoid to get there.
Go for the sensible home in the suburbs over the luxury townhouse, or the two-bedroom apartment over the penthouse. Just because you can afford it doesn't mean you should buy it, and the money you save can go directly toward your early retirement. Consider refinancing your home loan to a shorter term or making extra payments whenever you can. The less you have to pay for your housing, the more retirement savings you can accumulate before your 50th birthday.
Don't overreach on the cost of housing or day-to-day life. Refrain from having dinners out and buying those luxury goods that you could do without. The amount you save year over year by exhibiting control over your spending can add up quickly and total a significant number. Instead of spending away your disposable income, invest in a secure CD or money market account so it grows instead of disappearing on goods and services you don't really need.
Decide on a realistic target for how much income you'll need annually once you've retired. The more income you need, the more principal you must save to produce it. The interest rate earned on that principal is the other main factor in how much income you will be able to earn in retirement. The higher the interest rate you earn on your retirement savings, the less savings you will need to provide the income level you seek. For example, you will receive about $50,000 per year income whether you have saved $700,000 at a rate of 7 percent, or $2.5 million at a rate of 2 percent. Since interest rates are in constant flux, you must determine how much retirement income you will be comfortable with, then investigate the current interest rates to calculate how much principal you will need to save to hit your goals. Be prepared for future fluctuations.
What to Avoid
If you do not start saving for retirement early and continue to save throughout your working career, you may never reach the goals required to enjoy a comfortable retirement income at age 50. Many people start off great with retirement savings, then start a family or run into new expenses, or perhaps hit stumbling blocks like a lack of income due to a layoff. Your retirement funds should be left alone and kept strictly for retirement, while using other methods to cover any unexpected expenses. Whatever method you do choose, avoid running up debt, especially credit cards. Debt can lead to exorbitant interest charges and an even faster drain of your retirement accounts.
While the maximum contribution allowances for traditional 401(k) and IRA retirement plans occur after the age of 50, you can still use these accounts to accumulate enough to retire at 50 if you start early. Saving should start in your early twenties with about $12,000 in contributions per year, if your goal is to reach $1 million by age 50. If possible, put away the maximum allowed in your retirement account each year. This, plus any employer contributions you may be granted as part of your salary package, can help the principal to grow quickly. If by your mid-thirties you haven't yet started to invest in a retirement account, you will have to save somewhere in the mid-$30,000 range every year to end up with $1 million by age 50. This can be a much more difficult burden to manage.
Retirement Fund Withdrawals
Keep in mind that most withdrawals from qualified retirement plans, such as 401(k)s, will be hit with 10 percent penalties, plus income tax, if you withdraw the money before you turn 59 1/2. There is, however, an important exception to this rule. If you agree to withdraw enough every year to drain your account by a set mortality age, as determined by the IRS, you can make the withdrawals penalty-free. You must make the withdrawals for at least five years, and you generally must pay income taxes on the amount you pull out, unless you take it from a Roth account. This approach is known as the SEPP, or Substantially Equal Periodic Payments, withdrawal option. Since the SEPP process is complicated, you should get the advice of a qualified tax professional or financial adviser before you attempt to put a program in place.
- Pixland/Pixland/Getty Images