Saving for retirement at a typical retirement age, like 67, can be difficult. Saving for early retirement—with fewer years to earn and invest plus more years of retirement to fund—can be even more challenging. But life is all about choices.
Once you’ve made the choice to prioritize early retirement, it all comes down to planning—and maybe a willingness to make a few lifestyle changes that could help you reach your goal. Consider this step-by-step guide on how to retire early.
Are you dreaming of ditching the 9-to-5 grind before your 60s? You’re not alone! Early retirement isn’t just for the ultra-wealthy anymore—it’s becoming an achievable goal for anyone willing to make intentional financial choices. In this comprehensive guide, I’ll walk you through everything you need to know about planning for early retirement, from setting your retirement budget to handling healthcare concerns.
What Does Early Retirement Actually Mean?
Early retirement generally means leaving the workforce before the traditional retirement age of 65-67. For many ambitious folks, this could mean retiring in their 50s, 40s, or even earlier! Some super-motivated savers have even joined the F.I.R.E movement (Financial Independence, Retire Early), where the goal is to aggressively save 50-75% of income to retire in their 30s or 40s.
But here’s the important thing to remember retirement isn’t just about an age—it’s about reaching a specific financial number that will support your lifestyle without a regular paycheck
8 Essential Steps to Planning Your Early Retirement
Step 1: Define Your Early Retirement Goals and Vision
Before crunching any numbers, you need to get crystal clear on what early retirement means to you. Ask yourself:
- At what age do I want to retire?
- Do I want to travel extensively or stay close to home?
- Will I pursue hobbies, volunteer work, or start a business?
- How much will my dream retirement lifestyle cost?
Your retirement vision will determine your budget needs. For example, if extensive international travel is your goal, you’ll need a bigger nest egg than someone whose retirement dreams involve local volunteering and gardening.
Step 2: Create a Mock Retirement Budget
Time to get specific about your monthly expenses in retirement This step is crucial for calculating how much you’ll need to save.
A quick way to estimate: Take your current annual expenses and multiply by 33. This assumes a very conservative 3% annual withdrawal rate, which helps ensure your money lasts throughout a potentially long retirement.
For example, if your annual expenses are $50,000, you would aim to save approximately $1.65 million ($50,000 × 33).
When creating your budget. remember these key expenses
- Housing (ideally paid off before retirement)
- Healthcare (a major expense before Medicare eligibility at 65)
- Food and utilities
- Transportation
- Entertainment and travel
- Insurance
- Taxes
Don’t forget that some expenses might increase in retirement (like healthcare and travel), while others might decrease (like commuting costs and work-related expenses).
Step 3: Evaluate Your Current Financial Situation
Now that you know your target, assess where you stand today. This helps determine the gap between your current savings and your retirement goal.
Consider these factors:
- Current retirement account balances (401(k)s, IRAs, etc.)
- Other savings and investments
- Debt levels (aim to be debt-free before retiring)
- Current savings rate (percentage of income you’re saving)
- Years until planned retirement date
If you’re not sure where you stand financially, Ramsey’s 7 Baby Steps are an excellent framework:
- Save $1,000 for your starter emergency fund
- Pay off all debt (except the house) using the debt snowball
- Save 3–6 months of expenses in a fully funded emergency fund
- Invest 15% of household income in retirement
- Save for your children’s college fund
- Pay off your home early
- Build wealth and give
Step 4: Create a Bridge Account for Early Retirement
Here’s a challenge many early retirees face: most tax-advantaged retirement accounts (like 401(k)s and IRAs) penalize withdrawals before age 59½. So how do you access money in your early retirement years?
The answer: create a bridge account using a taxable brokerage account. Unlike retirement accounts, brokerage accounts allow you to:
- Invest without contribution limits
- Withdraw money anytime without penalties
Your bridge account should contain enough money to cover your expenses from your early retirement age until 59½, when you can access your retirement accounts penalty-free.
For example, if you plan to retire at 50 and need $60,000 annually, you’d want approximately $570,000 in your bridge account to cover 9.5 years of expenses ($60,000 × 9.5 years).
Step 5: Invest Strategically for Growth
For early retirement success, you need your money to grow significantly. This typically means investing more aggressively in growth-oriented assets like stocks or stock mutual funds.
Here’s a smart investment strategy:
- Max out tax-advantaged accounts first (401(k)s, IRAs, HSAs)
- Then invest in taxable brokerage accounts for your bridge fund
- Focus on low-cost, diversified investments like index funds
- Consider real estate investments for additional income streams
Remember, early retirement means:
- Shorter time to save
- Longer retirement period to fund
Both factors make investment returns critically important to your success.
Step 6: Make Lifestyle Changes to Boost Savings
Let’s be honest – retiring early requires sacrifice. The more aggressively you save now, the sooner you can retire.
Consider these powerful lifestyle changes:
- Increase your savings rate to 25%, 40%, or even 50%+ of income
- Downsize your home to reduce expenses
- Cut unnecessary subscriptions and services
- Reduce dining out and entertainment costs
- Drive older vehicles longer
- Take advantage of employer retirement matches
- Consider relocating to a lower cost-of-living area
- Develop additional income streams (side hustles, rental properties)
Each dollar you don’t spend today is a dollar (plus growth) available for your early retirement tomorrow.
Step 7: Plan for Healthcare and Taxes
Healthcare and taxes are two major challenges for early retirees that are often overlooked in planning.
Healthcare options before Medicare at age 65:
- COBRA coverage (typically for 18 months after leaving your job)
- Spouse’s employer insurance
- ACA marketplace plans
- Health Sharing Ministries
- Health Savings Accounts (HSAs) – triple tax advantage!
Tax-efficient withdrawal strategies:
- Understand which accounts to draw from first
- Consider Roth conversion ladders during low-income years
- Be aware of penalty-free withdrawal options:
- Rule of 55 for 401(k)s (if you leave your job in the year you turn 55 or later)
- Substantially equal periodic payments (SEPP) under IRS Rule 72(t)
- Roth IRA contributions (not earnings) can be withdrawn anytime
Step 8: Create a Social Security Strategy
While you can’t claim Social Security until age 62 at the earliest, it’s important to factor these benefits into your long-term plan.
Key considerations:
- Claiming at 62 results in permanently reduced benefits (up to 30% less)
- Full retirement age is 66-67 depending on birth year
- Delaying until 70 maximizes your monthly benefit
- Early retirees may need to bridge the gap between retirement and Social Security eligibility
For most early retirees, it makes sense to delay Social Security as long as possible to maximize this inflation-adjusted, lifetime income source.
Real Estate: Another Path to Early Retirement
Another powerful strategy for early retirement is investing in real estate. Rental properties can provide steady, passive income during your retirement years.
Important guidelines for real estate investing:
- Only invest after you’re debt-free and have completed Baby Steps 1-4
- Pay cash for investment properties (never finance them)
- Work with experienced real estate agents who know the local market
- Focus on properties in good neighborhoods with strong rental demand
- Calculate all expenses (maintenance, taxes, insurance, vacancies) when projecting returns
Common Early Retirement Mistakes to Avoid
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Underestimating expenses: Many people forget to account for inflation, healthcare costs, and occasional large expenses.
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Withdrawing too much: Taking out more than 3-4% annually significantly increases your risk of running out of money.
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Ignoring tax planning: Poor withdrawal strategies can result in higher taxes and penalties.
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Failing to account for healthcare: Medical costs can be the biggest expense in retirement, especially before Medicare eligibility.
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Not having a purpose: Early retirement should be about retiring TO something, not just FROM something.
Final Thoughts: Is Early Retirement Right for You?
Early retirement isn’t for everyone. It requires discipline, sacrifice, and careful planning. But if financial independence and the freedom to pursue your passions earlier in life appeal to you, it’s absolutely achievable.
Remember these key takeaways:
- Start planning as early as possible
- Increase your savings rate dramatically
- Invest aggressively for growth
- Create a bridge account strategy
- Plan for healthcare costs
- Consider working with a financial advisor
The question isn’t really “Can I retire early?” but rather “What am I willing to sacrifice now to make early retirement possible?”
I’ve helped hundreds of clients achieve their early retirement dreams, and the common thread is always the same: they prioritized their future freedom over current consumption. They made intentional choices daily that aligned with their long-term vision.
So, are you ready to start your early retirement journey? Remember, every financial decision you make today either brings you closer to or further from your early retirement goal. Choose wisely!
Step 1: Estimate how much you will spend in retirement
Knowing how much you spend each year and how your expenses might change in the future can help lock in a retirement budget. If you’re just getting started on the early retirement path, estimating your potential expenses can work too.
If you know what your annual income is today, you can start the planning process by assuming youll spend about 80% of the income you will be making before you retire every year in your retirement—thats known as your retirement income replacement ratio. For example, if your estimated preretirement income is $100,000, your spending could be around $80,000 annually in retirement.
If early retirement is your primary focus, it can make sense to consider how you could reduce expenses to save more now. It can also be a good idea to think about how you can spend less in retirement, which could reduce the amount you need to save or let you move up your retirement date.
Read Fidelity Viewpoints: How much will you spend in retirement?
Step 7: Make a plan for taxes and health care in early retirement
Aiming to retire before age 59½ may require some extra planning. If you think it could be a possibility, consider how you’ll pay expenses. Retirement accounts typically penalize withdrawals before that age, Medicare eligibility begins at age 65, and age 62 is the earliest Social Security retirement benefits can be claimed.
As you plan for early retirement, also consider learning about strategic withdrawal strategies that could help reduce the effects of taxes while helping to potentially stretch your savings.
Like diversifying your investments, it can be a good idea to aim for tax diversification as well, for instance owning taxable accounts like savings or brokerage accounts, in addition to tax-deferred accounts, like traditional and Roth IRAs or 401(k)s, and tax-advantaged accounts like HSAs. That can help you take advantage of multiple strategies to help manage taxes throughout your lifetime. Read Fidelity Viewpoints: Tax-savvy withdrawals in retirement
It can make sense to talk to a financial professional about tax-efficient ways of withdrawing from savings throughout a long retirement.
You may be able to withdraw money penalty-free from workplace retirement plans like a 401(k) the year you turn 55 or after if you have separated from the company—if the plan allows Rule of 55 withdrawals. Review your plan documents before making any decisions.
IRA withdrawals before age 59½ are allowed under Internal Revenue Code Section 72(t). Consult with a tax advisor if you are considering this strategy. There are 3 requirements for the distributions:
- Part of a series of substantially equal periodic payments made at least annually.
- Calculated according to one of 3 IRS-approved methods.
- Continued for 5 years or until the account owner reaches age 59½, whichever is longer.
Another important piece of the early retirement puzzle is health insurance.
There are generally a few options.
- If eligible, keep your existing health plan for up to 18 months after you leave your job through the Consolidated Omnibus Budget Reconciliation Act (COBRA).
- Join a spouse/partner’s health insurance through their employer.
- Review health plan choices available in the public marketplace.
- Consider saving in a health savings account (HSA) if you have an HSA-compatible health plan.
Tip: Visit our Finding health insurance before Medicare planner to see what options may be available to you.
Read Fidelity Viewpoints: 5 ways HSAs can help with your retirement
How to Retire As Early As Possible (Starting from $0)
FAQ
How do I plan to retire early?
Along with evaluating your sources of early retirement funding and stress-testing any plan, here are some other steps Peters recommends you take now if you’re planning to retire early: Estimate your desired retirement savings and ensure that you will have those funds in place on the day you officially retire.
Should you plan for an early retirement?
It’s important to understand that planning for an early retirement involves emotional readiness as well as your age and financial security. Preparing for early retirement can include maxing out your retirement savings and planning both expected expenses, like healthcare, and unexpected expenses.
How do you plan for retirement?
Half of retirement planning is figuring out your spending — the next is figuring out how much you need in savings. There are a few rules of thumb used by early retirees to figure out how much they might need to stash away.
What is early retirement?
Early retirement is retiring before you’re eligible for Medicare at age 65. But many Americans are interested in finding a way to retire in their 50s, 40s or even earlier. How much you need to save for retirement depends on your retirement goals and lifestyle.
When should you start a retirement plan?
Start as soon as possible. The earlier you start making steps toward retirement, the more options you may have in the future. Make the most of catch-up opportunities. Retirement saving accounts like IRAs and 401 (k)s allow catch-up contributions for those 50 and older. HSAs allow catch-up contributions as well. Beat lifestyle creep.
How can early retirement help you over the bridge to retirement?
By factoring your financial situation, personal goals and life interests into your early retirement plan, you can come up with a well-rounded plan that not only helps you over the bridge to retirement but also ensures you enjoy the experience along the way.
What is the fastest way to retire early?
- Contribute to your workplace retirement plan. …
- Avoid withdrawing from your retirement accounts early. …
- Ask yourself what’s more important to you. …
- Pay off & avoid debt. …
- Invest early and often. …
- Consider a Health Savings Account (HSA) for health expenses.
What is the $1000 a month rule for retirement?
How much money do you need to comfortably retire early?
Estimate your total savings needs
The rule of 25 operates on the idea that you should have 25 times your planned annual spending saved before you retire. That means if you plan to spend $30,000 during your first year in retirement, you should have $750,000 invested when you walk away from your desk.
Is $5000 a month a good retirement income?
For a single retired person anything over about 5K a month is comfortable. Assuming you own a home mortgage about 1.5K and a decent car you can live well on that. If you have a spouse also getting $5K a month, paid off mortgage you would be rich. Low income seniors get less than $3K a month, many less than $1500.
