Retiring at age 50 would be a dream for most people, as it would leave you with a few decades of time and, hopefully, health, to enjoy your life. The key to achieving this dream, though, is to put aside enough cash to fund that life so that you aren’t left in big trouble as you get older. While exactly how much you’ll need for retirement will largely depend on individual factors like lifestyle and location, some generalizations can be made. Here’s what you should know about whether $1.5 million is enough to retire at 50 — and how you can get that much in the bank by the time you wrap up your fiftieth trip around the sun.
For help managing your own retirement, consider working with a financial advisor.
Retiring at 50: The Basics
Retiring 15 years before the typical retirement age requires thorough planning. To retire at 50 with $1.5 million, your savings must produce sufficient income to cover your living expenses for several decades. As a result, it’s essential to consider your lifestyle, expenses and investment income.
In addition, retiring at 50 means you won’t use traditional retirement vehicles like IRAs or 401(k)s – at least not for the bulk of your nest egg. Because these accounts aren’t accessible until age 59.5, you must use alternative retirement savings instruments to reach your goal.
Determining How Much You Need to Retire
Retiring young or old means evaluating the same aspects: taxes, expenses and income. Here’s how to assess how much you need to retire:
Calculate Your Costs in Retirement
Your cost of living forms the foundation of a realistic retirement strategy.
Your preferences and habits affect your monthly expenses. For instance, dining out at restaurants five days a week will significantly impact your budget. Be honest with yourself about your habits so you end up with a realistic sense of how much money you need.
Where you live is another key part of determining how much money you need. According to a recent report by USA Today, Mississippi, a popular retirement state, provides retirees with $1.16 of purchasing power for every dollar. This ratio makes life affordable for retirees with modest incomes, unlike California, where a retiree’s dollar is worth 87 cents.
Taxes are another factor that affects retirement costs. Living in a tax-friendly state like Mississippi or Georgia means paying no state income tax. However, it’s essential to consider how your income streams, such as real estate or annuities, affect your tax situation. Additionally, property and sales taxes vary depending on the location, which can impact your overall expenses.
As you age, healthcare expenses increase and become crucial in retirement planning. For example, HealthView Services Financial’s data reveals that a couple retiring at 65 with no significant health issues will spend approximately $662,156 on healthcare throughout their retirement.
Therefore, for a couple retiring at 50, it’s advisable to budget for a similar amount, accounting for an additional 15 years of medical expenses. One suggestion is to allocate 15% of your annual income toward healthcare costs.
If you retire at 50 and have children at home, you must factor in additional expenses. According to The Washington Post, the average annual cost of raising a child is about $17,000. Hence, it’s vital to consider these expenses when planning your retirement budget.
Identify Retirement Income Streams
The next aspect to consider in your retirement plan is your income streams. The goal is for $1.5 million to generate enough annual income so you don’t withdraw the principal. For instance, if your $1.5 million nest egg provides a 5% return, your annual income is $75,000. However, stock portfolios are riskier than other assets, meaning your income can fluctuate. So, diversification is crucial to balance your assets while providing sufficient income.
While planning for retirement income, Social Security may come to mind. A comprehensive retirement plan should factor in this income. However, since the earliest age to collect Social Security benefits is 62, retiring at 50 means you’ll have to wait at least 12 years to receive these benefits. Therefore, your plan must ensure you arrive at a Social Security-eligible age with a solid financial position.
Look at the Numbers
Now, it’s time for an example with specific numbers. Say you and your spouse want to retire at 50 with no children in the house. Your life expectancies are 80, so you plan a 30-year retirement. In addition, you’ll retire in Mississippi, which has no state income taxes. Here are your annual expenses:
- $20,000 for housing
- $10,000 for healthcare
- $7,000 for utilities and property taxes
- $6,000 for food
- $8,000 for entertainment, phone and internet
- $3,000 for auto upkeep and insurance
So, your annual expenses are $54,000 total, or $4,500 monthly.
When you start retirement, you’ll have several income sources: $250,000 worth of certificates of deposit (CDs) with an average return of 4.5%, a $250,000 savings account with a 4% interest rate and a $1 million brokerage account with an average return of 5%. Your CDs and savings account provide $1,770 of monthly income, and the brokerage account provides $4,165.
Because you’re married filing jointly, you’re in the 12% tax bracket, leaving you with about $1,557 of your bank account and CD income after taxes. In addition, because you make less than $83,350 annually, you don’t pay any long-term capital gains taxes on your brokerage account. Therefore, your total monthly income after taxes is $71,250 annually. This number is about $17,000 higher than your expenses, giving you wiggle room in your budget. Keep in mind that your brokerage account will likely introduce short-term gains at some point, and you’ll pay standard income taxes on that money.
Unfortunately, inflation will increase your cost of living each year at an average rate of 3%. Your $54,000 of annual expenses will increase by thousands of dollars after five years due to inflation. So it’s wise to save your surplus income in this scenario to account for price hikes in the future. Plus, you can work part-time to supplement your income until you collect Social Security.
You become eligible for Social Security at 62 but can wait until 70 to take it. Delaying it will increase your benefit by about 8% per year. For instance, the Social Security Administration’s 2022 Statistical Supplement estimates the average 62-year-old’s monthly check to be $2,364. If you and your spouse both worked, that’s $4,738. Therefore, you can almost double your monthly income when taking Social Security at the earliest possible time.
How to Boost Your Retirement Income
It’s possible to retire at 50 with $1.5 million, but it may require frugal living unless you boost your income. You can do so with these strategies:
Delay Social Security Benefits
You can adjust your Social Security benefit by deciding when to begin receiving it. Specifically, you can choose any age between 62 and 70, with 70 providing the highest possible payment. However, you can obtain a substantial check before reaching 70. Each year you delay your Social Security benefits after 62, your benefit increases by 8%. For instance, waiting until 66 can increase your Social Security check by about 40%.
Increase Your Interest Rate
You can increase your income by putting a portion of your money into certificates of deposit (CDs) or savings accounts with the best rates on the market. Current economic trends have given rise to high-yield savings accounts with interest rates of 4% or more, meaning you can receive solid returns without taking any risks in the stock market.
Understand Your Income Tax Implications
The tax implications of retirement income streams can differ significantly. For instance, you won’t pay income taxes with a Roth IRA, while rental property income is subject to regular income taxes.
Remember, retiring at 50 means you won’t utilize traditional financial vehicles since they are not available to retirees under 59.5 years of age. Instead, you may opt for brokerage accounts, savings accounts, investment property, etc. Plus, capital gains taxes apply to brokerage accounts, but you can access your funds anytime.
By contrast, regular income taxes apply to savings accounts and annuities. That said, non-qualified annuities are subject to lower taxation. Therefore, it’s crucial to understand the tax implications of your chosen savings vehicles. This way, you’ll estimate your retirement income more accurately.
How to Make Your Savings go Further in Retirement
If you’re concerned about straining your finances by retiring at 50, here are several tips to help stretch your savings:
Use a Budget
One of the most important aspects of financial management is using a budget. Budgeting allows you to record expenses and compare them to your income. Doing so allows you to practice a vital principle of personal finance: live beneath your means. Fortunately, many free budgeting apps and programs can make budgeting achievable. Start with your bank’s mobile app; it probably has a zero-cost budgeting tool.
A common conception of budgeting is it keeps you from spending at all. However, a well-crafted budget does the opposite: it creates a spending plan that makes room for the fun stuff, too. This way, you can treat yourself and your loved ones without stressing because you’re using money in the ‘Entertainment’ item of your budget.
Choose Low-Fee Investments
Administrative fees can erode your investment income. For example, annuities, mutual funds, exchange-traded funds and real estate investment trusts (REITs) might have high management costs. Therefore, it’s vital to examine the fee structure of any investment before committing money to it. For example, by doing your research and choosing a fund with passive management, you could save thousands of dollars per year. Likewise, robo-advisors usually charge low fees, making them an ideal option.
Care for Your Health
Another aspect to consider when planning for retirement is the cost of healthcare. Although everyone will need healthcare at some point, taking preventive measures means you determine when and how you receive care. Specifically, regular checkups and exercise can decrease your amount of hospital visits, promoting both your physical health and financial well-being.
In addition, working part-time is a viable financial solution for early retirees. This approach will generate extra income and offset inflation. As a result, it can also help you delay Social Security for longer, boosting your benefit.
Pay Off Debt
Debt can restrict your financial freedom, especially if you ignore it. For instance, credit card balances and student loans can weaken your finances because of their explosive interest rates, which cause balances to grow rapidly. This dynamic is challenging because investment gains usually don’t surpass the annual percentage yield (APY) on your debt. Thus, it’s vital to pay off high-interest debts, whether you’re in the middle of your career or trying to maintain your lifestyle in your golden years.
You can adopt one of two approaches to repay multiple debts. The first is the snowball method, where you repay your smallest balances before tackling larger debts. Conversely, the avalanche method means focusing on repaying debts with the highest interest rates first, saving you money in the long run since high rates accumulate more debt.
The Bottom Line
Retiring at 50 with $1.5 million requires investments that allow access before the conventional retirement age. Therefore, your plan should include brokerage accounts, savings accounts and real estate. Moreover, calculating your expenses with precision helps ensure your income can cover them. Since your $1.5 million fund needs to last for decades, you’ll need to be innovative in generating income until you become eligible for Social Security.
Retirement Planning Tips
- Investing $1.5 million for retirement means diversifying with low-fee assets with high returns during your career. Your shortened timeline means you don’t have a margin for error while working. Thankfully, a financial advisor can help you create a robust retirement plan founded on solid investments. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Although retiring at 50 means enjoying many years of good health, it’s possible you’ll enter a living facility in the future. Your retirement plan can account for this change once you understand the cost of independent living for seniors.
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