How you can retire early

Key points

• Early retirement is generally defined as leaving the workforce before your mid-60s.
• To retire early, you may need to save and invest aggressively.
• Extremists may join the financial independence, retire early movement.

Retirement is often viewed as the finish line of the rat race. As with most finish lines, it’s nice when it comes sooner rather than later. But early retirement isn’t always straightforward. You may even question whether it’s possible or right for you.

Here’s what you need to know about how to retire early and whether it makes sense.

What is early retirement?

The definition of early retirement can be murky.

“Early retirement generally means retiring before one is eligible for Social Security and Medicare,” said Maura Schauss, senior vice president and financial advisor at Wealth Enhancement Group.

By this definition, early retirement occurs before your mid-60s, as the earliest you can collect Social Security is age 62 and Medicare coverage doesn’t start until age 65. 

You can also define early retirement based on the Social Security Administration’s definition of full retirement age, which is between 66 and 67, depending on the year you were born.

That said, while many U.S. workers want to retire by their mid-60s, everyone is on their own timeline. 

How to retire early in seven steps

While early retirement can be a lofty goal, it is achievable if you plan and prepare correctly. “Many believe early retirement is just for wealthy people, but this is absolutely not true,” Schauss said.

Here are seven steps many experts recommend if you want to retire early.

1. Calculate your retirement expenses

First, determine how much retirement will cost you. Keep a detailed budget for a year and then subtract any expenses you won’t have in retirement. For example, when you retire, maybe you won’t eat as many lunches at restaurants or have commuting costs.

“On the other hand, you need to add in the additional expenses related to your desired lifestyle,” said Brad Levin, managing director and senior wealth advisor at The Colony Group. “Think about how you want to spend your time in retirement and what those leisure activities will cost.” Perhaps you want to travel more or improve your golf swing with a country club membership. 

And don’t forget about health care. If you retire before becoming eligible for Medicare, you’ll likely need to pay for health care on your own. “This is probably the most significant recurring expense that people underestimate,” Levin said.

A healthy 65-year-old couple can expect to spend more than $774,000 on health care in retirement, according to health care cost-projection software producer HealthView Services. A couple retiring before age 65 may spend more. 

Consult a financial advisor for a more personalized estimate of these costs.

2. Determine how much you need to save

After calculating your retirement expenses, figure out how much to save to cover them. The best way to do so is with a financial plan.

A financial plan is like a road map. It provides directions for getting from today to your future early retirement. You can work backward to determine the best path.

Once you have goals set, they become guideposts for most other financial decisions. For example, your plan can help you decide whether to take on additional debt, how much to contribute to your retirement savings and how much risk to take with your investments.

Considering your longevity is another important aspect of your financial plan. If you underestimate your longevity, you could outlive your assets. Levin said he generally advises projecting a life expectancy of at least 90, “possibly more based on personal health and family health history.”

3. Adjust your budget

You may need to adjust your retirement budget based on your financial plan.

Your residence may be another source of wealth to tap into. Consider downsizing or relocating to an area with a lower cost of living to increase your retirement nest egg.

4. Pay off your debt

Paying off your debt is essential to early retirement with one possible exception: your mortgage.

Levin said that most mortgages have low, fixed interest rates with deductible interest, so the after-tax cost is fairly low. Thus, retiring early with a mortgage is feasible. The same can’t be said for other types of debt.

High-interest debt like credit cards and consumer loans can be costly and detrimental to retirement sustainability.

Experts advise paying off all nonmortgage debt as soon as possible. 

5. Max out your retirement contributions

Early retirement relies on a simple tenet. “The more you save and the earlier you start, the better off you will be,” Levin said.

Aim to max out your retirement contributions. If you can’t do so today, raise the amount you contribute by a certain percentage annually until you reach the limit, which is $23,000 for most employer-sponsored plans and $7,000 for individual retirement accounts in 2024. Consider maxing out both your employer-sponsored plan and IRA if you’re serious about early retirement.

Tip: If you’re 50 or older, you can contribute an additional $7,500 to most employer-sponsored plans and an additional $1,000 to IRAs in 2024.

6. Invest for growth

To maximize the return on your retirement savings, you must invest for growth. That generally means leaning heavily on stocks, which tend to outperform more conservative investments like bonds over the long term.

From 1928 to 2023, the S&P 500 index, which comprises the 500 largest publicly traded U.S. companies, had an average annualized return of 9.9% with dividends reinvested. Medium-grade corporate bonds with a BAA rating from Moody’s returned more than 6% and 10-year U.S. Treasurys returned more than 4% per year on average during the same period.

Remember that stocks tend to be more volatile than other assets, so you may be in for a bumpier ride. Most experts advise gradually shifting to more conservative and stable investments as you near retirement to minimize the risk of a bad year hurting your portfolio right before you plan to withdraw from it.

7. Stick to your plan

Now that you have an early retirement plan, the final step is following it. But that can be easier said than done.

While it’s easy to let a temporary setback or market downturn persuade you to abandon your plan, that’s when you should lean on it the most. Your plan should be built on the assumption that there will be good and bad years for the stock market.

If you struggle to stay the course when times get tough, consider partnering with a financial advisor who can provide oversight and reassurance.

What to know about financial independence, retire early (FIRE)

Early retirement extremists sometimes join the FIRE movement. FIRE proponents save and invest upward of 70% of their income to achieve financial independence before the conventional retirement age.

You achieve financial independence when you have enough savings and investments to support your desired lifestyle without relying on a paycheck. If that sounds a lot like retirement, that’s because financial independence is the cornerstone of retirement.

But that leads to a distinction between full retirement and some forms of FIRE retirement. “Many clients who achieve financial independence keep working, as they enjoy work more knowing that they would be fine and able to enjoy the same lifestyle if they left,” Schauss said. “Achieving financial independence means that you can enjoy what brings you happiness while having financial peace of mind.”

Who is FIRE designed for?

FIRE is designed for those who believe in saving and investing. You should be prepared to make sacrifices today to achieve a better tomorrow.

It also makes sense for people who don’t want to be beholden to others financially. If you like the idea of working as little or as much as you want while maintaining the same quality of life, then FIRE could be a good fit. 

Is retiring early right for you?

Now that you know how to retire early, the question of whether retiring early is right for you remains. Unfortunately, there is no one-size-fits-all answer.

And retiring early isn’t just a financial decision. The emotional component is equally important and likely to be overlooked.

Shifting from earning a regular paycheck to living off of your savings can be challenging and stressful. You may also lose your sense of identity and connection without your workplace.

That said, it never hurts to have the option to retire early. Knowing you’ll be OK without your job is a great superpower, even if you never use it.

Frequently asked questions (FAQs)

How can I retire early?

To retire early, you must accumulate enough wealth to support your desired lifestyle without relying on a paycheck. That often entails aggressive budgeting to maximize your retirement contributions and other savings.

How much do I need to retire early?

How much you need to retire early depends on how much you expect to spend in retirement. Consider where you’ll live, how you’ll spend your time and what those activities will cost.

What is FIRE?

FIRE stands for financial independence, retire early. It is a movement to achieve financial independence — when you have enough assets that you no longer need to work to support your lifestyle — much earlier than the conventional retirement age.