Many people dream of retiring early and enjoying their golden years without the stress of work. But retiring at 50 is not an easy feat, especially if you want to maintain a comfortable lifestyle and avoid running out of money. Here are some of the financial challenges you might face if you plan to retire at 50, and how to overcome them.
1. Accessing your retirement savings
One of the biggest hurdles to retiring at 50 is accessing your retirement savings without paying a penalty. Most retirement accounts, such as 401(k)s and IRAs, impose a 10% early withdrawal penalty if you take money out before age 59 1/2. This means that if you retire at 50, you will have to either pay the penalty or find other sources of income for almost a decade.
There are some exceptions to this rule, such as the Rule of 55, which allows you to withdraw from your 401(k) without penalty if you leave your job in or after the year you turn 55. Another option is to use the Substantially Equal Periodic Payments (SEPP) method, which allows you to take out a fixed amount from your IRA or 401(k) every year based on your life expectancy. However, both of these strategies have their own drawbacks and limitations, so you should consult a financial planner before using them.
Alternatively, you can save some money in a taxable brokerage account, which has no age restrictions or penalties for withdrawals. You can also use other sources of income, such as rental properties, dividends, royalties, or part-time work, to supplement your retirement income until you can access your retirement accounts without penalty.
2. Paying for health insurance
Another major expense that can derail your early retirement plans is health insurance. Medicare eligibility begins at age 65, so if you retire at 50, you will have to find your own health coverage for 15 years. This can be very costly, especially if you have preexisting conditions or need frequent medical care.
One option is to get health insurance through your spouse’s employer, if they are still working and have a family plan. Another option is to buy health insurance through the Affordable Care Act (ACA) marketplace, where you may qualify for subsidies based on your income and household size. However, these options may not be available or affordable for everyone, so you should shop around and compare different plans and prices before retiring.
You should also consider saving money in a Health Savings Account (HSA), which is a tax-advantaged account that you can use to pay for qualified medical expenses. You can contribute up to $7,500 in 2023 if you are 50 or older and have a high-deductible health plan. The money in your HSA grows tax-free and can be withdrawn tax-free for medical expenses at any age. You can also use your HSA as a backup retirement account after age 65, when you can withdraw the money for any purpose without penalty (but subject to income tax).
3. Waiting for Social Security benefits
The third challenge to retiring at 50 is waiting for Social Security benefits. The earliest age to claim Social Security benefits is 62, but you will receive a reduced amount if you claim before your full retirement age (FRA), which is between 66 and 67 depending on your year of birth. If you retire at 50, you will have to wait at least 12 years before you can start receiving Social Security benefits, and even then, you will get less than your full benefit amount.
To maximize your Social Security benefits, you should consider delaying your claim until after your FRA or even until age 70, when you will receive the maximum benefit amount. However, this may not be feasible or desirable for everyone, especially if you have health issues or other sources of income. Therefore, you should estimate your Social Security benefits using the online calculator provided by the Social Security Administration and factor them into your retirement budget.
You should also be aware that your Social Security benefits may be taxed depending on your income level and filing status. Up to 85% of your benefits may be subject to federal income tax if your combined income (which includes half of your Social Security benefits plus other taxable income) exceeds certain thresholds. You may also have to pay state income tax on your benefits depending on where you live.
Retiring at 50 is possible, but it requires careful planning and preparation. You will need to save enough money to last for at least 40 years in retirement, while also dealing with the challenges of accessing your retirement savings, paying for health insurance, and waiting for Social Security benefits. You should consult a financial planner who can help you create a realistic retirement plan that suits your goals and needs.