Retiring at 50 is an aspiration for many people who want to spend more time pursuing their passions and enjoy life in a more relaxed manner.
With that said, in order to experience the obvious advantages of retiring at 50, it is vital to plan ahead and make sure you are financially secure during retirement.
Here are five ways to make it happen.
Start saving early
When you want an extra-long retirement without having to compromise on the quality of life, you are going to need to save a significant part of your income.
More importantly, you need to start saving early. You cannot just start saving seriously at 45 in the hope of retiring at 50. For a comfortable and financially secure early retirement, you need to let your savings gain from the power of compounding.
For instance, if you start setting aside $20,000 every year from the age of 25, which gives you an annual return on investment of 5%, you would have a retirement fund of nearly $1 million at the age of 50.
But if you start saving at 35, and make the same amount of annual savings and returns, you will end up with just about $450,000 by the time you are 50. So, the earlier you start saving, the more you gain by way of compound interest.
Maximize your tax benefits
When you are saving significantly for an early retirement at 50, tax planning becomes an important part of the equation. It may be prudent to invest a considerable part of your savings in retirement accounts, such as a 401(k), IRA or Roth IRA to reduce your tax consequences.
For example, all contributions that you make to a regular 401(k) are pre-tax. Based on this, your taxable income will reduce when you set aside a part of your salary into a 401(k).
Importantly, your tax savings will increase in proportion to the increase in your income.
Make diversified investments
To successfully achieve your goal of retiring at 50, you should be prepared to make diversified investments according to your risk tolerance.
If you are completely risk averse, you may not be able to grow your money sufficiently to ensure a financially secure retirement at 50. Consider the following investments in your portfolio to earn a robust annualized return:
Mutual funds: These professionally managed funds pool money from a large number of investors and make diversified investments in bonds, stocks and short-term debt. The shares you buy in a mutual fund represent your part ownership of the fund and the returns it may produce.
Index funds: These funds are comprised of portfolios that essentially clone the composition and performance of financial market indexes, such as the S&P 500. Compared to actively managed mutual funds, an index fund generally has a lower cost.
Exchange traded funds: ETFs are quite similar to mutual funds, with one key difference that an ETF will trade on the stock exchange just like any individual stock. Therefore, the share price of an ETF will increase or decrease on a daily basis as it gets traded on the market.
Avoid major debts
Just as wise investments can give you the benefits of compound interest and high returns, poorly managed debts can quickly dissolve your savings under the burden of high interest costs.
Therefore, if your goal is to have enough financially security to be able to retire at 50, make sure you have no heavy or expensive debts that are eating into the savings you had set aside for retirement.