While most people only dream about retiring at 50, there are people out there that turn this dream into a reality. What is their secret? Did they win the lottery? Rob an armored car? Print counterfeit money? While there may be a few people that did do those things, the reality is that most retire at 50 by following 3 simple pieces of advice.
How To Retire At 50 In 3 Steps
Step 1: Save More – A Lot More
Conventional thinking says that if you want to retire by 65, you need to put away about 10-15% of your income. If you want to retire at 50, you need to save more than this, to the tune of 40% or more. Why so much? First, you are going to need money to live on for a longer period of time while not earning an income. Secondly, you have to make up for the lost years that you won’t be contributing or saving to a retirement plan while you work – namely those last 15 years or so. With the power of compound interest, those last 15 years of saving really add up.
So how do you save 40% or more of your income? There are a few steps you can take:
Focus mainly on windfalls: If you get a tax refund, you need to invest all of it. Same goes for any bonuses you get at work. These chunks of money really make a huge difference in the long run. For example, if you are 35 and receive a $3,000 tax refund each year, investing that and earning 8% annually brings the investment value to close to $88,000 when you are 50.
If you get a bonus each year from work for $2,000 and invest that every year for 15 years earning you 8% annually, you have another $58,000. That’s close to $150,000 you have without really changing your lifestyle!
Pay attention to raises: don’t change your lifestyle when you get a raise. Put that money into savings. Keep living off of the same amount you are used to. It’s too easy to justify a new car here or a vacation there because you “deserve it”. The next thing you know you are spending the entire raise.
Then focus on big expenses: Look at your mortgage and see if there is way to save money there. A great option is a fake refinance. In some cases, downsizing or moving to a lower cost of living area might make sense. Ideally, though, this would not be your first choice. Follow all of the other tips and see if you can make it work where you currently live.
From there, turn your attention to insurance and see if you can get lower premiums.
After that, you need to start looking at high ticket items. One that comes to mind is a car. Drive your car for 10 or more years. When it becomes too costly to repair, buy a late model used car at a good price. Don’t fall victim to short-sightedness. This is when you look at the $1,000 it costs to repair your car and would rather have a new car and not worry about the repairs. Remember, $1,000 to fix your old car is a lot cheaper than spending $400 a month on a brand new car. Take the time to do the math so you know when it is time to get rid of your old car.
Finally, pay attention to the little expenses: I’m not saying you have to cut all of the fun out of your life, but you do need to look over your spending (you should be budgeting your money) and see if there are things you can cut out of it. You can check out my eBook, Spare Change, for over 150 ideas.
Step 2: Cut Your Spending
I mentioned the car buying above, but you really need to apply that idea to your overall lifestyle. When it comes to wanting to retire at 50, most won’t be able to buy designer goods and take luxury vacations and still quit our jobs early. It just doesn’t work that way. You have to make sacrifices in your life – sacrifice a little now for an amazing life of early retirement, or live like you want now and work until 65 or later. It all comes down to choices. You decide how you want your life to play out.
The overall reason though of why you want to cut your spending is so that you can learn to live on less. The less money you have going out each month, the less money you need to come in. If you can live on $2,000 a month, you have a greater chance of retiring at 50 than someone that needs $5,000 a month or more.
Since your mortgage is your biggest monthly expense, you have to pay it off before you retire. If your mortgage payment (not including taxes) is $900 a month, that is close to $11,000 a year less that you need to live off of if you pay it off before retiring.
The same idea applies to any other debt you have. You have get rid of that debt before you retire at 50. If you have debt, read about my snowball method to get out of debt quickly, or read my review of Ready For Zero. Either option will help you eliminate debt fast. I can’t stress this enough – the less monthly expenses you have, the easier it will be to retire at 50.
Step 3: Diversify Your Income
I’m not sure what your idea of early retirement is, but after talking with many retirees, they are bored if they just sit around all day. This sounds awesome when we have a job, but in reality, it gets old fast. We need something to do to keep us occupied. For many, we turn to our hobbies. Wouldn’t it be great if we could turn our hobbies or skills into an income? It’s easier than you think.
There are all sorts of ways to earn additional side income. Spend some time now thinking of your interests and see if there is a way to make money off of it. Maybe you work in human resources or look over resumes all day. You could sign up on Fiverr and offer resume critiques for $5. There are all sorts of options for you. If you are having a tough time coming up with ideas, check out this post.
Here is why additional income streams are so valuable. First, if you start a side business now, you can save 100% of this money (or use it to pay off any debt you might have). This will help you increase your chance to retire at 50. Secondly, when you have an additional income stream, you will need to pull less money from your investment accounts. This is ideal because the more money you have invested, the more it can grow. This lessens the chances of you running out of money early.
So there you have the 3 steps for how to retire at 50:
- save as much as you can
- learn to live on less
- create additional streams of income
None of these are out of the ordinary, you just have to decide if you are going to follow these steps or not. How much does retiring at 50 mean to you? When you answer that, you will know if you can follow these 3 steps.
[Photo Credit: Steven Depolo]