How would you define “early retirement”? Sixty, maybe? Fifty-five?
That’s how I defined it when I wrote my book, You Can Retire Sooner Than You Think. But since then I’ve discovered that many people have a far more ambitious idea of early retirement – 50.
While that’s not what I meant by “retiring sooner than you think,” retiring at 50 is entirely possible. And, no, you don’t have to be a successful business owner, pro athlete or lottery winner to make it happen. With some careful planning and discipline, Americans with average incomes can get there, too.
Ultimately, determining whether you can retire early comes down to calculating precisely what you’ll need for retirement, and then looking at your savings to see if you can retire without Social Security or a pension since neither are typically available until at least age 62.
The first step in this process is to think about how you will spend your retirement. Do you want to travel the world? Build a mountain or beach house? Or will you be content to spend your days in your current home reading, gardening and playing with the grandkids? Different scenarios require very different funding levels.
Remember to factor in both inflation and our longer lifespans. If you wrap your career today at age 50, you could be retired for 30-plus years. Another critical consideration is medical insurance. You’ll need to cover that cost at least until you reach 65 and are eligible for Medicare.
Use this retirement calculator to get an idea of how much income you will need to fund your post-career life.
If you turn in your office key at 50, you will probably need more than savings to see you through retirement. Your assets also need to produce some source of residual or perpetual income. Think RIDD. If you want to get RIDD of your 9 to 5 job you should have, Rent, Interest, Dividends and Distributions.
Let’s break this down.
Rent – A $150,000 home could produce about $1,000 a month in rent.
Interest – income generated by bonds.
Dividends – income from stocks.
Distributions – income from REITs and other investments that don’t fit neatly into the stock or bond category.
Depending on how you weigh each category, an income producing portfolio should be able to generate an annual “cash flow” in the 4 to 5 percent range.
Based on my $1,000-Bucks-A-Month Rule, I typically recommend older retirees plan on a 5 percent withdrawal rate from their investments. If you retire at 50, you should plan on withdrawing only about 4 percent per year.
To put that into better perspective, if you have $1,000,000 in your investments in your 50s, you would be able to withdraw $40,000 a year in gross income at a 4 percent withdrawal rate. If you combine that with one or two rental properties that you own mortgage-free, you’re looking at an income of roughly $50,000 to $60,000 a year.
If you’re ready to move away from your career but don’t yet have enough RIDD income, you might consider moving to part-time work. Whether you stay in the same field or completely switch things up, part-time income could allow you to step out of the rat race without having to draw on your nest egg immediately. The right part-time job might also provide you with health insurance.
Super early retirement is not an easy thing to achieve; however, it’s entirely possible for those who are determined and plan ahead. It’s important to start early with saving and invest in assets that will continue to pay you over time. Live by TSL – Taxes, Savings, and Life. If you put 30 percent of your gross income towards taxes, 20 percent towards savings, and then live off the remaining 50 percent, you should increase your chances of a very early retirement.