Many Americans retire between the ages of 65 and 67. Leaving the workforce before age 62 is often considered early retirement. Some of the major factors that contribute to early retirement include investing when you’re young, maximizing savings and living below your means.
How to Retire Early
Many people dream of leaving the workforce early to travel, spend time with family or pursue a passion project.
But early retirement isn’t easy to achieve. Experts agree that leaving the workforce before age 62 requires discipline and proactive planning.
- Define Your Early Retirement Goals
- It’s easier to create a budget when your retirement plan and objectives are clearly defined.
Evaluate what early retirement looks like for you. Different goals carry different price tags. Traveling the world, for example, is expensive. Will you pursue a side hustle or passion project that can supplement your savings after you leave your 9-to-5 job?
- Create a Budget and Establish a Target Number
- Next, consider how much money you’ll spend each month in retirement. Some costs may decrease, such as gas or mortgage payments, while others may increase, such as health care.
Many experts recommend saving and investing 25 to 30 times your expected annual expenses.
Online early retirement calculators are useful tools to find your target number, or the amount of money you need to accumulate to cover future expenses. Consulting with a professional financial advisor is another good option.
- Live a Frugal Lifestyle
- Unless you start earning an unusually high salary at an early age, you’ll need to dramatically adjust your lifestyle in order to make early retirement a reality. Take a hard look at your biggest expenses, including housing, transportation and food. Then start cutting.
Decisions won’t be easy. Ask yourself an important question: How hard am I willing to work now so I can retire early?
- Invest Aggressively and Maximize Your Retirement Accounts
- Retirement accounts, including 401(k) plans and IRAs, are tax advantaged ways to invest for retirement. If your company offers a 401(k) match, it can help you reach your investment goals even faster.
But keep in mind: If you tap into your retirement account funds before the age of 59 and a half, you’ll face a 10 percent penalty from the IRS. If you want to retire before this age, consider opening a Roth IRA, which doesn’t face the same tax penalty, or investing money in a personal brokerage account.
- Research Your Health Insurance Options
- Health insurance is a major consideration for early retirees. You won’t be eligible for Medicare until age 65, and your employee health insurance ends when you leave your job. Research the Affordable Care Act marketplace and other private insurance options — then adjust your budget accordingly.
- Create a Backup Plan
- Consider worst case scenarios that may derail your plan, such as a major economic downturn or the death of a spouse. How will you recover? Think about how to return to work, start a new career or launch a side hustle if your financial needs change in the future.
Investing at an early age is crucial to early retirement.
When you start investing in your 20s, your money has more time to grow and enjoy the snowball effect of compounding interest.
This is when the interest you earn on savings and investments builds on itself.
You can also take greater risks — and reap potentially greater returns — when you’re young.
When you first start out, investing in index funds or ETFs is a good way to build your portfolio. As your financial knowledge grows, you can expand your portfolio with individual stocks or real estate.
Investing in your company’s 401(k) plan or opening a Traditional or Roth IRA are other smart, proven ways to grow your money.
Challenges of Early Retirement
Your biggest hurdle will be saving and investing enough money by the time you retire. That’s true at any age, but early retirement makes this even more challenging.
Your money has less time to grow and it needs to last longer, too.
You’re also more likely to take Social Security as soon as possible at age 62 if you’re no longer working. But doing so greatly reduces your monthly benefit compared to people who wait until full retirement age (between age 66 and 67) or even later at age 70.
Tapping into retirement account money may also be difficult. The IRS levies a 10 percent tax penalty for 401(k) and IRA withdrawals before age 59 and a half.
Knowing what age to retire is an important decision. Early retirement may sound ideal, but it isn’t realistic for everyone.
FIRE (Financial Independence, Retire Early)
An aggressive strategy to achieve early retirement has emerged in recent years. It’s called the FIRE movement, or Financial Independence, Retire Early.
It encourages people to be frugal, cut expenses, maximize savings and leave the workforce as soon as possible in their 50s, 40s or even younger.
There are two main camps in the FIRE community: “Lean FIRE,” or extreme frugality, and “Fat FIRE,” where people spend and save at a more average rate.
The FIRE movement has attracted a lot of criticism over the years. It’s often only practical for the wealthy, who can afford to sock away 70 to 80 percent of their income.
It also leaves followers vulnerable to potential pitfalls. The longer you spend in retirement, the more likely unexpected life events may derail your plans.
8 Cited Research Articles
- McKenna, K. (2020, July 21). Is 55 Too Early To Retire? What You Need To Retire Early. Retrieved from https://www.forbes.com/sites/kristinmckenna/2020/07/21/is-55-too-early-to-retire-what-you-need-to-retire-early/
- Farrington, R. (2020, January 27). Fat FIRE: The Above-Average Pursuit Of Financial Independence. Retrieved from https://www.forbes.com/sites/robertfarrington/2020/01/27/fat-fire-the-above-average-pursuit-of-financial-independence/
- Internal Revenue Service. (n.d.). IRA FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
- Internal Revenue Service. (2019, November 22). Retirement Topics – Contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions
- Brockman, K. (2019, November 1). Here are 3 signs that you're on track to retire early. Retrieved from https://www.usatoday.com/story/money/2019/11/01/how-to-retire-early-3-signs/40446813/
- Frugal Friends Podcast. (2019, September 13). Episode 73: Financial Independence Through Frugality | The Frugal FIRE Movement. Retrieved from https://www.frugalfriendspodcast.com/episode-73-financial-independence-through-frugality-the-frugal-fire-movement/
- Bohan, J. (n.d.). The 5 Essential Retirement Moves to Make in Your 20s and 30s. Retrieved from https://money.com/collection-post/retirement-moves-20s-30s/
- Hogan, C. (n.d.). How to Retire Early. Retrieved from https://www.daveramsey.com/blog/how-to-retire-early