How to retire at 50

Retiring early is the dream for many workers. While we're living longer and healthier lives, most people don't want to wait until 67 to stop working. Retiring at age 50 requires careful planning, focused savings, and a realistic budget for everyday expenses, healthcare costs, and other factors like housing. Here's how to retire at 50, including how much you need to save, how debt impacts your plan, and how to fund retirement until you can access Social Security and Medicare in your 60s.

How to retire at 50

Define what retirement looks like for you

Everyone's definition of their ideal retirement looks different. And that's ok, especially when retiring at age 50. While some can afford to completely stop working, others seek semi-retirement by working part-time or taking a job they love that pays less money.

The most important thing is to be realistic about lifestyle expectations and how much you'll spend each month. Many people in the FIRE community (financially independent, retire early) choose to retire at a young age, knowing they'll need to cut way back on spending to make it work. But you don't need to cut back on spending if you save enough money and have adequate income from investments, rental properties, or other sources. Translate your spending goals into an annual income target to help you calculate how much you need to save and which investments to select.

Estimate how long your retirement needs to last

Nobody knows how long they have to live, which makes it hard to plan for retirement since you don't know how much you'll need to spend. While the average U.S. life expectancy at birth is between 75 and 80 years old, the average number of years you can expect to live increases as you get older.

With healthy eating, regular exercise, and continuing medical advances, it is possible that you can outlive these expectations as well. That being said, you don't want to run out of money in retirement. If you're going to retire at 50, you need to plan for 30 years or more of retirement income.

How much do I need to retire at 50?

When thinking about how to retire at 50, people often ask, "What is your number?" Your number is the retirement savings goal needed to generate enough income to cover your annual spending. Once you've tallied up your expenses, a quick rule of thumb is to multiply that number by 25. That means you can withdraw 4% per year from your portfolio to pay your bills.

The 4% Rule is a relatively conservative withdrawal rate assumption, but you can adjust it based on your appetite for risk. Be careful not to assume too high a return because investments can be volatile from one year to the next, and you'll need to set aside a portion of your returns to cover inflation and taxes.

If you qualify for Social Security or a pension, or if you have other sources of income, you can adjust your "number" accordingly and retire with a smaller nest egg.

Have a plan for wealth building

When planning to retire at 50, you'll need to build enough wealth to last for 30 years or more. Since you'll miss out on your peak earning years in your 50s and early 60s, you must maximize your pre-retirement income at an earlier point in your career. That may include working longer hours, job hopping to boost pay, or pursuing careers that tend to offer higher wages.

It may be tempting to spend more of your income since you're working so hard. But you have to resist that urge and save aggressively to meet your bigger goal of retiring early. Saving aggressively includes maxing out traditional retirement funds, like 401(k)s and IRAs, and earning the employer match that boosts your contributions. Alternative investments like health savings accounts (HSAs), annuities, and cash-value life insurance policies help you save extra money in tax-advantaged retirement accounts once you've reached your contribution limits in 401(k)s and IRAs.

Any extra money you receive should go toward your goal of retiring early. Bonuses from work, equity compensation, and windfalls, such as tax refunds, lawsuit settlements, or inheritances, should also be invested in a brokerage account or in an asset that offers tax advantages. These unexpected sources of cash can accelerate your early retirement timeframe.

Build an investment strategy

As part of your plan to build wealth, you need to devise an investment strategy. While your strategy should include 401(k)s and IRAs, if you plan to retire at 50, you'll need access to money outside retirement accounts that you can access before reaching age 59 1/2. Traditional IRAs and 401(k)s offer tax deductions for savers, but the money is taxable upon withdrawal. Additionally, you'll owe a 10% penalty on withdrawals before you turn 59 1/2.

A Roth IRA and a Roth 401(k) allow you to save for retirement, but the money is tax-free when withdrawn. Plus, you can avoid early withdrawal penalties by only taking out as much as you've contributed. For example, your Roth IRA may be worth $300,000 after contributing just $100,000. This means you can withdraw as much as $100,000 to create pre-retirement income without any penalties.

Investing in a brokerage account is another smart choice. There are no contribution limits or rules on when or how much you can withdraw from your account. You also aren't restricted to investing in a small list of approved investments, like you are with a 401(k). While you will pay taxes on capital gains and dividends, you receive special tax treatment when selling investments that you've owned for more than a year.

Consider working with a financial advisor to determine how to allocate your investments. It is important to construct a portfolio that matches your appetite for risk, your need for income, and your long-term investing horizon.

Manage debt before retiring early

One of the best ways to retire at 50 is to have all of your debt paid off. Not only will you save a lot of money on interest, but eliminating debt payments lowers the amount of money you need to make each month to pay your bills. Many people in their 40s and 50s still have credit card debt, student loans, car loans, and other types of debt. It is crucial that you pay this debt off if you want to retire early.

Start by taking inventory of all your debt, the repayment terms, and how much you owe each month for minimum payments. Consider implementing the debt snowball (smallest-balance-first) or debt avalanche (highest-interest-rate-first) strategies to tackle your debt. One strategy isn't necessarily better than the other. The most important thing is to pick a debt management plan and strategy, stick to it, and avoid adding any unnecessary debt to your balances.

Decide how housing fits into retiring at 50

Where you'll live in retirement has a great impact on your retirement plan. Many retirees plan to move to a lower-cost area and use their home equity to boost their nest egg. However, at 50 years old, you may still have kids in grade school or a spouse who plans to continue working. If that's your situation, downsizing or moving to a lower-cost area may not be an option.

Mortgage payments are the largest bill for many households. Paying off your home is a smart way to reduce monthly expenses and retire with a smaller nest egg. If that's not possible, how will you make mortgage payments until the house is paid off? Some retirees seeking to make payments more affordable with less income refinance their mortgage to extend the repayment term and lower the monthly payment.

Homeowners with enough equity can withdraw cash to finance an early retirement. A reverse mortgage isn't available until you turn 62. However, you can get cash out through a home equity investment (HEI) without adding another monthly bill to your expenses.

Plan for income

When you retire at 50, you're missing out on two critical retirement plans that most seniors rely on: Social Security and Medicare. Unless you have a qualifying disability, the earliest you can claim Social Security is at age 62. Even then, if you claim before full retirement age (67 for most workers), you'll lose out on up to 30% of your earned benefits.

Social Security benefits are based on your highest 35 years of earnings. Retiring early not only misses out on your peak earning years that could boost your retirement benefits, but your benefits could suffer because if you worked less than 35 years, a zero is added to the years without any earnings. This is a double-whammy that can spoil your retirement. To plan ahead effectively, you'll need to invest in creating a passive income stream, or having enough saved.

Prepare for healthcare costs

Healthcare expenses are a huge concern for retirees. Yet, Medicare health insurance coverage isn't available until age 65. Since most early retirees no longer have access to workplace healthcare plans, they must shop around for coverage on the open marketplace. You'll need to research these costs ahead of time when planning your retirement budget.

While you may be tempted to purchase a lower-coverage plan to save money, think about your current health and your family's medical history. How often do you go to the doctor, what prescriptions are you on, and are you at a higher-risk for expensive illnesses? These answers determine what kind of medical insurance to buy. Saving money in a health savings account (HSA) during your working years can help pay for these expenses until you qualify for Medicare.

Long-term care is another consideration. While you may be healthy now, many seniors spend time in a long-term care facility before passing away. Talk with a financial advisor to determine if it makes sense to buy a long-term care policy or to fund your potential care through savings.

The bottom line

Many workers dream of early retirement, but they don't think it can actually happen. These nine steps answer the question of "How do I retire at 50?" and make it possible for the average American. No matter how much you make, you can build a solid retirement by keeping your expenses low, maximizing your savings, and avoiding debt. Maxing out retirement accounts is a good start, but you'll also need access to money you can withdraw before reaching 59 1/2 or when Social Security and Medicare become available. If you need help building your early retirement plan, consult with a financial advisor.