What You Need In Order To Retire Before Age 65

There are so many articles written and so much talk today about how a lot of folks in their 50s and 60s either won’t be able to retire before age 70 or may never be able to retire at all. Instead of rehashing this downer of a scenario, I would like to discuss what a person or a couple needs to have today in order to retire before age 65.

I have consulted with many clients who had this simple question: Can I retire when I’m 60? I’ve even had a few people ask me if they are in good enough shape to retire at age 55. They simply had no idea if they had enough money invested and enough future income to cover all that they wanted to do in retirement.

Let’s start with a couple who is 50 years old and is wondering if they can retire at age 60. They currently have $500,000 saved in their IRAs. Half of their money is in equities and half in short-term treasury bonds. They save $10,000 a year, they will receive a combined $30,000 in social security payments when they reach age 67, and their plan is to spend $50,000 a year in retirement. I have assumed 3% inflation per year, 6% returns on equities per year, and 2% returns on their treasury bonds per year.

I inputted all of these assumptions into our retirement planner and found that this couple would have about $665,000 when they retire and that they will run out of money when they are 79 years old. Clearly this couple cannot retire when they are 60 years old. One interesting question is, how much money would they need to have at age 60 in order for their funds to last until they are 95 years old? After running a few scenarios I found the answer to be just a tad bit over $1 million.

So when can this couple retire? It turns out that in order for their funds to last until they are 95 or older, they will have to postpone their retirement until they are 65 years old. At that age they will have $763,000 saved.

Part of the problem this couple had with attempting to retire earlier is that their income simply wasn’t coming close to meeting their expenses. Recall that half of their funds are in treasury bonds earning 2% per year. But what if we were to move them into high quality dividend paying stocks that generate closer to 3.5% per year in dividend returns and 2% in price appreciation? A few of my favorite dividend payers for retirement portfolios that have a dividend yield of 3.5% or higher are Johnson & Johnson (JNJ), Sysco (SYY), AT&T (T), and Eli Lilly (LLY).

I swapped all of their treasuries for the above stocks and equally weighted them. I assumed they will return their dividend yield plus 2% in price appreciation per year.

With all of this extra dividend income helping to cover expenses, this couple can now retire when they are 60 years old and their funds would last until they are 103. By simply moving their portfolio out of low yielding treasuries and achieving much higher income and a better total return, they have completely changed their retirement situation.

Of course, moving their funds into equities is riskier than keeping it in shorter term treasuries. But the goal is to find companies with a history of paying strong and growing dividends over time. If we can find these types of companies, price fluctuations are not nearly as important as that dividend check coming through each quarter.

Each person and couple has a different situation and might need to change a variety of things in order to retire earlier. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to get to your goals.