Most people will continue to work into their 60s (and sometimes beyond) because they have no idea when they can retire comfortably. But in today’s world it has become much easier for anybody to figure out if and when they can retire.
The Key to Retiring in Your 50s
The following is a guest post, written to make you think a little harder about your retirement. Do you have plans for retiring in your 50s??
I want to take a look at a couple that thinks they might be able to retire when they’re 59 years old. But they’re not sure, so their current plan is to keep working until they’re 65.
Can They Retire Early?
Our couple, John and Jane, are 52 years old today. Their savings total $475,000 and all of it is in IRAs. They have 75% of their money in stocks and 25% in bonds. I used the powerful financial planning software WealthTrace to run their retirement plan. My assumptions can be seen below:
I ran through their plan using Monte Carlo analysis, which runs 1,000 scenarios on the plan, moving the rates of return on all investments each year. The change in the rates of return is based on the past history of returns, volatility, and correlations with other assets.
The analysis showed that this couple has only a 57% chance of never running out of money in retirement. This is nearly a coin flip, which is obviously dangerous when we’re talking about using our last penny in retirement.
I like to see Monte Carlo results above 75%, at a minimum. So how can this couple get to that point? I ran some scenarios and found that to get to a 75% number, they need to do one of these three things: 1) Save $3,500 more per year, 2) Cut spending in retirement by $3,000 per year, of 3) Retire at age 64 instead of 59.
More Income In Retirement Means Better Odds Of Success
One problem this couple has in retirement is that their income is not covering their expenses. See the chart below:
Another option besides the three I mentioned is to shift their investments to less volatile dividend paying stocks. Before they begin receiving social security they have a major gap in their income vs. their expenses. Then when they do finally receive social security, they still have a gap.
My suggestion to them is to place all of their bond money into solid dividend paying stocks with a long history of dividend payouts. In today’s low interest rate world, this is sometimes the only way to generate enough retirement income. I found that if they invest in stocks such as Altria, Exxon, and Johnson & Johnson, the dividends over time will help them immensely.
So I made this switch in their portfolio and re-ran their plan. Now look at their income vs. expenses below:
They are now covering expenses once they begin receiving social security. This also helps boost their Monte Carlo probability number to 83%.
It is definitely riskier to move everything into stocks. But the question should be, how much am I getting for taking on a bit more risk? Monte Carlo helps us answer this question, and in this example, the answer is clear. This couple should move their bond money to solid dividend paying stocks if they want to retire at age 59.
So what about you? Are you thinking about retiring in your 50s?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.