Retiring before age 60 is but a dream for many people approaching this age. Unfortunately, the average retirement age has increased over the last decade as many folks have figured out that they a) didn't save enough and/or b) couldn't use their home as a cash machine any more.
But there are still plenty of people, of course, who are looking to retire before they are 60. The question is, what does it take? I am not going to include those public sector workers who might be receiving a $70,000 or more pension for life at age 55. We know they can retire before they're 60. But what about everybody else?
Let’s start with a couple who is 50 years old and is wondering if they can retire by age 60. They currently have $500,000 saved. Half of their money is in taxable accounts and half is in IRAs. I also assumed that 70% of their money is in value stocks and the rest is in medium-term treasury bonds. They save $10,000 a year, they will receive a combined $40,000 in social security payments when they reach age 67, and their plan is to spend $50,000 a year in retirement. I have assumed 2.5% inflation per year, 6% returns on equities per year, and 2% returns on their treasury bonds per year. Here are my assumptions summarized:
Inflation (CPI) | 2.5% |
Current Age of Both People | 50 |
Age Of Retirement | 60 |
Age When Both People Have Passed Away | 90 |
Social Security at age 67 (combined) | $40,000 per year |
Average Savings Rate | $10,000 per year |
Total Investment Balance Today | $500,000 |
Recurring Annual Expenses in Retirement | $50,000 |
Investment Mix | 70% U.S. Value Stocks, 30% Medium Term Treasuries |
Investment Location | 50% in taxable accounts, 50% in IRAs |
Return Assumption Value Stocks | 6% per year |
Standard Deviation Value Stocks | 16.20% |
Return Assumption Treasuries | 2% per year |
Standard Deviation Treasuries | 7.20% |
I inputted all of these assumptions into our retirement planner and found that, in the static base case, this couple would have about $700,000 when they retire and that they will never run out of money. However, when running a Monte Carlo analysis that generates one thousand simulations shocking investment returns, I found that they only have a 61% probability of never running out of money.
Let’s say this couple is not comfortable with this probability and they would like to see it above 80%. What can they do to get there? I ran various scenarios and found at least three ways they can boost the probability to 80%: They can retire two years later, they can save $2,000 more per year, or they can cut their expenses in retirement by $5,000.
But the goal is to retire at age 60, so the first idea is out the window. Also, saving more is not an option for many people as they’re already struggling to make ends meet. Lastly, spending $50,000 in retirement is pretty frugal as it is, so this couple doesn’t want to do that either.
Part of the problem this couple has with attempting to retire earlier is that their income simply isn’t coming close to meeting their expenses. Recall that 30% 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 4% per year in dividend returns (which includes dividend yield and dividend growth) and 2% in price appreciation? A few of my favorite dividend payers for retirement portfolios that have a dividend yield of 2.5% or higher are Johnson & Johnson (JNJ), Intel (INTC), Merck (MRK), AT&T (T), and Eli Lilly (LLY).
Company | Div. Yield | 1 Yr. Div
Growth Rate | 5 Yr. Div
Growth Rate (Annualized) |
JNJ | 2.9% | 6.7% | 8.2% |
INTC | 3.8% | 11.2% | 14.1% |
MRK | 3.6% | 10.5% | 2.0% |
T | 4.9% | 2.3% | 3.8% |
LLY | 3.5% | 0.0% | 2.3% |
I swapped all of their treasuries for the above stocks and equally weighted them. I also assumed that these dividend payers are less volatile than an equity index, which has been shown to be true given their relatively steady dividend contributions to total returns. I assumed a standard deviation (volatility) of 12% for the dividend paying stocks.
With all of this extra dividend income helping to cover expenses, the probability of them never running out of money, even if they retire at age 60, is 87%. This is a very comfortable spot to be in.
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.
I usually get at least one person asking the question, "But what if I don't have $500,000 saved already!" Let's look at an example where a couple is 50 years old, but only has $250,000 saved. The question is, when can they retire and have a probability of success of at least 80% (assuming they move to the dividend-growth strategy).
I ran these numbers and found that this couple would have to wait until age 65 to retire comfortably.
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.