Today, most people retire at 65 or sometimes more. But what if you want to retire at 50 instead? Not all of us have a government job with a pension plan!
Some people make it their top financial objective to retire early. It’s their dream and they are willing to work hard and sacrifice while they’re young in order to retire early and do whatever they want when they want.
It is possible to retire 10 or 15 years earlier. However, it takes more than just living modestly in your 20s, 30s and 40s. Furthermore, your biggest accumulation years will need to be maximized. You’ll have to make intelligent decisions and also have Lady Luck on your side.
There are lots of variables at play when trying to retire by 50. Some can be controlled while others can’t. Here are 6 points you need to consider to help you get started.
What type of retirement do you want?
Everyone is different and will have different expectations for retirement. Hence, there are no right or wrong answers to this question.
What kind of life do you want to lead when you retire? Do you want to travel around the world? Do you want to just stay home and read and watch TV? Do you want to go out more? Do you want to stay in 2-star or 5-star hotels?
In general, it is estimated that you’ll need between 60% and 100% of your salary for each year you retire. 2-star hotels = 60% – 5-star hotels = 100%. You get the picture. Remember that this number is not easy to estimate. After all, the amount you’ll need will have to last until your death. So the best guestimate, if you want to retire at 50, is to first determine what salary you want at that age. Then, how many years will your retirement last? Let’s say from age 50 to say age 82, which is the life expectancy in Canada. 82 minus 50 = 32 years. Then multiply 32 years by your salary at age 50. That number is what you need to reach, but you won’t have that many years to accumulate it. At least, it is a good place to start.
Your investment plan to retire at 50
Retiring at 50 isn’t that easy, mainly because you’ll have fewer years to accumulate your wealth. How you can make up for that loss of time varies.
If you’re lucky enough to have a large salary, you could afford to invest as much as you can and still have enough wealth to retire by 50. Or, if you don’t have a high salary, you could aim for higher returns with a more aggressive portfolio. However, aggressive portfolios are made up largely of stocks, which are volatile. You need to remember that and manage the risk and your emotions when markets go down.
Either way, success is dependent on a solid and intelligent plan and, depending on your investment strategy, some good luck. Investment-wise, you could either go through a financial professional or manage your own portfolio. Keep in mind that financial professionals charge fees and/or commissions, but if your “retiring by 50” plan is heavily dependent on a savvy investment strategy, then it’s money well spent.
Maxing out your retirement accounts
Tax-advantaged retirement accounts like RRSPs and TFSAs have annual contribution limits. The 2024 annual limit for your RRSP contributions is 18% of your annual income or maximum $31,560. As for TFSAs, they are limited to $7,000 yearly. By maxing out one or all of your retirement accounts, you’ll have more tax-advantaged retirement money that can grow interests over the years.
However, having such a high amount of money loose to contribute to your RRSP every year is easier said than done. Especially when you’re in your 20s, still climbing the professional ladder. It means that in your 20s, 30s and 40s, live below your means as much as you can. Hold off on expensive vacations or vacationing at all! Drive your beat-down car as long as it’ll run, and direct all of those funds toward the future. The sooner you can max out your retirement accounts, the better. It’s doable but not easy.
Planning to retire early takes sacrifice. But if it’s important to you, they’re necessary sacrifices.
How will you finance the first 15 years?
RRSP accounts have a 10% to 25% penalty for withdrawals taken before you turn age 71. Therefore, if you retire at 50, you’ll need to tap into other types of accounts to finance those first 15 years.
Those “other” resources will have to come from traditional savings or by withdrawing from your unregistered accounts (anything but your RRSPs). Since there are no withdrawal dates for unregistered or TFSA accounts, you could begin withdrawing money at 50 when you officially retire. All withdrawals are subject to taxes (except your TFSA), but only on the return portion of your investments.
Your family’s medical history
This ties into point number 1. You need to calculate your personal “magic number”. But how long are you going to live? At some point healthcare will be the biggest expense in retirement. If your family has a history of chronic illnesses, that could impact how much money you’ll need for retirement. Or won’t need. Keep in mind that long-term care insurance can soften the cost of nursing homes and other healthcare costs you could incur in retirement.
Having a retirement income strategy
Just because you retire doesn’t mean your money has to stop working for you and growing your wealth. As you get closer to 50, get a financial planner if you don’t already have one. They’ll help you come up with a withdrawal plan to stretch your money through retirement. Strategically withdrawing from your registered (TFSA, RRSP) and unregistered accounts (bank account, GICs (guaranteed income certificates)) will get you a long way.
Also, some retirees work part-time jobs to keep money coming in, and sometimes because they are bored. These strategies, when executed properly, can maximize your money. Again, this is where a financial planner helps.
What to remember if you want to retire at 50
Retiring early isn’t easy. You’re trying to build more wealth in less time, so obviously that’s challenging. It involves making financial sacrifices in your 20s, 30s, and 40s, then using those savings wisely to build wealth.