Many workers daydream about retiring early, focusing on the joys of not working and having more time to pursue their interests. However, you’ll need to do some homework to turn your fantasies into reality. Let’s dig deeper and look at five steps you should take with your finances to support a retirement at age 50.

What Steps Can You Take To Retire At Age 50?

Before you retire from your job, you’ll want to make sure you can support yourself, and your spouse or family if applicable, for the rest of a potentially long life. Most people who reach age 50 can expect to live another 30 to 40 years, or even longer if they’re healthy and if their older relatives lived into their 80s or 90s.

Step 1 is to understand and learn to balance the common-sense formula for retirement security:

       I > E, or income greater than your living expenses

You’ll want to work both sides of this formula to make it effective, so calculate the amount of reliable cashflow you expect each year throughout your lifetime and estimate the annual amount of living expenses you expect as well.

The following steps provide details on both sides of this formula. After you complete the steps for the first time, you might need to repeat some of them to adjust your income or living expenses in order to balance the formula.

How Much Money Do You Need To Retire At 50?

Step 2 is to develop a stream of retirement income that will last the rest of your life. To state the obvious, the more investments you have that generate cashflow to pay for living expenses, the easier it will be to retire early. And there are a few different, reasonable ways to generate cashflow from savings.

One possibility is to invest in mutual funds or ETFs that generate dividends and interest, spend just the investment income, and leave the principal intact. These funds could be invested significantly in stocks or real estate investment trusts to help protect against inflation for such a long retirement. This strategy would give you cashflow indefinitely and could work if you have sufficient investments that generate the cashflow you need.

For example, suppose you find investments that generate dividend and interest income of 3% per year. An investment of $1 million would generate cashflow of $30,000 per year. If you need cashflow of $60,000 per year, you’d need savings of $2 million; if you need $90,000 per year, you’d need savings of $3 million; and so on.

You could boost your income by investing in bonds or CDs, which currently earn 5% or more per year. However, you’d leave yourself vulnerable to inflation, a serious risk over a long period of time.

Another advantage to spending just the interest and dividends from your investments is that you’d preserve the principal for spending in your later years, when you might need it for high medical or long-term care expenses.

If you need more cashflow than can be generated by interest and dividend income, you have two options. The first would be to draw from the principal of your investments. This will be a serious challenge, however, if you live to your 90s or beyond. Another serious challenge is weathering stock market crashes, which are inevitable over a long retirement. For these situations, you may want to work with a qualified financial planner to help you develop strategies.

The other option for generating additional cashflow is to work part time, which is the next step.

What Type Of Retirement Do You Want?

Many people don’t have sufficient financial resources for a traditional, full-time retirement, where you stop working for money altogether and live only on your financial resources for the rest of your life. As a result, Step 3 is to think about exactly how you define “retirement.”

If retirement means “working much less,” then you might want to consider working part time to supplement your financial resources. In this case, try to find work that you enjoy and lets you feel like you’re retired and are satisfied with your life. Another goal could be to find a job that doesn’t require a long commute, which can be a large source of dissatisfaction among many workers.

One creative strategy is to work just enough to cover all your living expenses, so you don’t have to tap your financial resources. This allows your existing savings and Social Security benefits to grow until your mid-60s or even age 70, when they’re large enough to support your retirement.

Whether you decide to work part time will influence how much retirement savings you’ll need to invest, as covered in Step 2. That’s one reason why you might need to repeat these steps until you balance the common-sense formula in Step 1.

The next step to balance the common-sense formula is to closely examine your living expenses.

Will Your Spending Change?

Step 4 involves estimating your living expenses, now and in future years. If your cashflow from all sources is insufficient to cover those current and future living expenses, you’ll need to reduce your spending.

For most people, their home is the largest expense, so finding a home or an area with a lower cost of living is a logical step. Transportation is often many people’s second-largest expense, so another way to save could be to get by with fewer or older cars, or with public transportation. A win-win solution would be to find a lower-cost home and neighborhood where you can walk or bike to many of your daily or weekly activities.

If you own a home, be sure to budget for future, large home repairs that are inevitable over a long retirement.

Do You Have Children?

The cost of dependent children can often be a serious challenge for people who want to retire early. You’ll want to estimate these costs when estimating all your living expenses in Step 4. For many parents, college expenses can be on the radar as well. Fortunately, expenses for dependent children won’t be paid for the rest of your life, so you’ll want to guestimate when you’ll stop paying those.

What About Health Care?

Medical and dental insurance are expenses that could increase significantly if you no longer participate in an employer-sponsored health plan. As a result, Step 5 involves understanding how much you’ll pay for health and dental insurance.

The website can help you estimate your health care premiums for various health care plans. A quick review of this website shows high-deductible plans costing $500 to $700 per month for a single 50-year-old; low-deductible plans can easily cost $1,000 per month or more. When you reach age 65, eligibility for Medicare, most likely your premiums will reduce significantly.

Can You Retire At 50?

This post provides a high-level overview of the steps you need to take to retire at age 50. There are many more details you’ll need to address once you dig into your homework.

There are also other important considerations for retiring at age 50, most importantly what you’ll do with your new-found freedom. If you’re married, you’ll also want to involve your spouse in these decisions and consider the impact on your family.

Taking the steps outlined here will help you understand the tradeoff between your freedom and your spending. As a result, you might conclude that you need to delay retirement for awhile. In the process, you might also reflect on the reasons why you want to retire. Both considerations can help you lead a more satisfying life—now and in your retirement.