Can You Retire by 50?

Want to retire by 50? Yeah, wouldn't we all like that. Well, maybe it's possible for you. Here's an article from Money Magazine about just that. It starts with a question from a reader:

I see a lot of people asking you if they can retire early based on the assets they have. But I want to know how I can retire early. I'm 25 now and I contribute 10 percent of my income to my 401(k) each year and I maxed out on my Roth last year. I have about $10,000 saved so far. What more should I do so I can retire by age 50?

Here's a summary of Money's advice:

Well, at the very least you appear to be on the right track toward a comfortable retirement. You're socking away a decent percentage of your income in your 401(k) and you're maxing out on the Roth. But if you really want to be able to call it a career by age 50, I suspect you're going to have to do more.

Why? First of all, if you retire at 50, you'll have at least 12 years until you can begin collecting Social Security, and if you start at the earliest possible age, 62, you'll get a much smaller benefit than if you hold off until full retirement age.

This means you're going to be depending on your investment portfolio a lot longer than if you retire at a more traditional 65 or so. Indeed, in addition to starting early, you must also plan for the fact that people are living a lot longer these days. The odds of living to age 90, 95 or 100 are a lot higher than many people think. So if you retire at 50, you could be drawing on your savings for 40 years or longer.

Remember too that to the extent you'll be depending on money you've accumulated in tax-advantaged retirement accounts, you'll also likely have to pay a 10 percent premature withdrawal tax on top of regular taxes. You can begin tapping a 401(k) without the 10 percent penalty if you leave your company at age 55 or later. But you must wait until age 59 1/2 to get penalty-fee withdrawals from your IRA.

All of which is to say that you're going to have to put together a pretty good size nest egg if you want to live comfortably on it the rest of what could be a pretty long life.

How big? Well, that depends on how much annual income you'll need to draw from your investments and how long you'll need it. But here's a decent rule of thumb: for every dollar you want in income in retirement, you should probably have about $25 in savings. This assumes you'll be drawing the money for 30 years or longer and that you'll increase the amount you draw each year for inflation. So if you want a $40,000 income, you'll need about $1 million in assets.

I've never heard this rule of thumb before and it seems a bit conservative (after all, $40,000 on $1 million is only a 4.0% return on your money), but it's better to be conservative when doing estimates of this sort. You certainly wouldn't want to assume a 10% return, quit your job, and run out of money waaaaay too early!

Comments

[Caitlin]

it's not a 4% return once you start factoring in inflation...correct?

[FMF]

Good point! It's an absolute 4% return, but maybe only a 1-2% real return depending on inflation.

[Flexo]

I don't think they're really talking about a 4% rate of return... 4% is the safe withdrawal rate. Over time, in average market conditions, 4% is the approximately the maximum you can withdraw from your investments (thus producing $40,000 income on $1,000,000 in assets) each year so that your assets don't run dry.

So the article isn't talking about investments returning 4% each year... it's talking about withdrawaing 4% from your investments.

More info from Retire Early Home Page:
http://www.retireearlyhomepage.com/safewith.html

[MRH Research]

Retirement at any age is possible if you have the insiders secret ~