Your Guide To Early Retirement

Early retirement can be possible, if you’re able to plan ahead and sustain the financial behavior it takes to get there.

Let’s take a closer look at how early retirement works, what age qualifies as early retirement, and what plans you’ll need to put into practice if you’re looking to retire early.

On average, people in the U.S. retire at 63 years old — if you retire earlier than that you can be considered someone who has retired early. Here’s where knowing how much money people need to retire is key, so you can plan whether you will have the means to live out your golden years without having to actively work for income.

How Much Retiring Early Reduces Social Security Benefits

According to the Social Security Administration (SSA), the normal retirement age (NRA) is 67. That is when you can receive your full Social Security retirement benefits. However, eligible American workers can elect to receive Social Security as early as age 62. Doing so may reduce the retirement benefits you’re eligible to receive by as much as 30% each month until you reach the NRA, according to the IRS. 

If you were born in 1960 or later, for example, your full retirement age is 67. If you elect to begin taking benefits at age 62, a theoretical $1,000 monthly Social Security benefit would be reduced to $700 – 30% less than at 67.

You may be able to delay taking Social Security benefits up until age 70. It may be an option to consider if you have access to other income, such as a part-time job or distributions from other retirement accounts.

The longer that you wait to retire, the more Social Security benefits you may be able to claim.

IRS Rules For Using Retirement Accounts Early

In most cases, if you make withdrawals from your retirement accounts like IRAs and 401(k)s before 59.5 years old, you may face additional tax penalties. Some Internal Revenue Service (IRS) rules and provisions may allow you to access retirement accounts and benefits early, like if your income earning potential is limited due to disease or disability. Many retirement accounts also allow you to withdraw funds early if needed, for reasons such as covering an emergency medical expense or dip in income due to unexpected job loss.

Social Security benefits aren’t the only factor to take into consideration when learning how to retire early. Several variables to consider include health care, target retirement age, and possible future income plans. You may benefit from working with a financial planner to reach the personal finance goals needed to retire early.

1. Retirement Goals

Consider what you want your lifestyle to look like during retirement. Do you want to spend your time volunteering, traveling, or taking classes? What does early retirement mean to you, and what do you plan to do in retirement? Understanding how you want to spend your time can help you get a better handle on how much you’ll need to budget for early retirement.

2. Retirement Funds

You may not be able to rely on Social Security benefits, so consider the rules and limitations of various retirement accounts like a 401(k) and an IRA. You’ll want to create a budget during your retirement years. That way, you can maximize the benefits of these accounts and minimize how often you’ll need to draw on them so you may pay less in taxes.

3. Health Care

You have several options for health care once you’re retired:

●      Getting on a spouse’s plan

●      Purchasing private insurance

●      Finding a plan via the Affordable Care Act marketplace

●      Expatriating to a country that offers nationalized or subsidized health care plans

You may also want to take into consideration your home and the expenses you may need to cover to be able to age in place.

4. Social Security Plan

It’s not uncommon to find your Social Security retirement benefits reduced by as much as 25%-30% if you retire early. While you can start collecting Social Security benefits at 62, some may wish to hold off several years for a larger payout at 67 years old. Even after your full retirement age, you can delay your benefit up to age 70 to further increase the amount of your monthly benefit.

All this said, it’s important to establish a Social Security plan and weigh several financial scenarios to decide which makes the most sense for you. Consider talking to a financial planner or lawyer for advice.

5. Future Income

Early retirement often means taking a considerable dip in income, though for those who pursue part-time work, side gigs or an independent business, it doesn’t have to. Looking for ways to bring in extra funds can help bolster your retirement savings to pay expenses such as increased property taxes and rising costs of groceries.

6. Emergency Funds

Setting aside money for financial emergencies and other unexpected costs is helpful to protect yourself and your family when life happens. For example, markets can fluctuate, interest rates can change and economic conditions can shift — all could influence your retirement funds.

Retiring early entails determining the amount you need, coming up with a strategy that works for you, and having a backup plan in case you need additional income.

1. Determine How Much Income You Need

Look at what your desired lifestyle is —don’t forget about other expenses like healthcare, taxes and other one-off expenses — and estimate how much you will spend during retirement. Use that number to estimate how much income you’ll need. Consider using tools like retirement calculators to determine an annual income and a breakdown of your spending.

2. Create A Strategy For Saving And Investing

Look at what types of retirement or investment accounts — like IRA or 401(k) — you can access during early retirement. Then, consider how much you will need to contribute each month until your target retirement age.

3. Establish A Solid Budget

Creating a solid budget helps to ensure you have enough to spend to live comfortably. While it’s hard to accurately estimate exactly how much you’ll need — your needs could change, for example — you can look at your current spending trends as a guide.

4. Consider A Part-Time Job For Extra Retirement Income

Many early retirees find that it pays to take on part-time work, whether due to their financial circumstances, to pursue their interests or simply help pass the time. Doing so doesn’t necessarily mean going to work for someone else either, as many opt to start a small business or do remote gig work to supplement their income.

The Financial Independence, Retire Early, or FIRE, movement encourages practitioners to spend as little as possible and invest as much as possible to more rapidly fund their retirement savings. Those who embrace its philosophy often look to retire in their 30s or 40s by aggressively cutting expenses and channeling as much income as possible into investments.

Most FIRE devotees aim for 25 times the annual income needed during retirement to be able to retire early. This amount is also based on if you were to only withdraw 4% of your investment income each year.

As with any major financial decision, there are several pros and cons attached to early retirement.

The answer depends entirely on your personal circumstances, and if you (a) feel comfortable that you can reliably fund yourself through years of potential economic uncertainty, and (b) have enough passions and pursuits to keep busy from day to day. Early retirement’s biggest challenges often come in two varieties. On the one hand, they frequently manifest in the form of unexpected costs and economic hiccups that threaten to knock planned budgets off-course. On the other, those who pursue early retirement often face concerns finding people to spend time with or having to reimagine one’s daily routine and purpose.

Have more questions about retiring early? Here are the most frequently asked ones. 

What is a good age for early retirement?

The best age for you to retire early is when you’re able to sustain yourself financially and have thought through a plan on how you’ll spend your golden years.

Is the FIRE movement a good idea?

The FIRE movement can work for some folks if they’re dedicated to saving and investing a high percentage of their income and have a plan for what they plan on doing after retirement. However, in most cases, those with a higher income tend to be able to make it work much easier than others. 

What’s considered an early retirement?

People who retire early are anyone who does so before the average age of retirement. Or, it’s anywhere between 62 and 67 years old if you’re considering how the Social Security Administration views retirement and how it pays out benefits. 

How much do I need to retire at 55?

The amount you need to retire at 55 will depend on factors such as your healthcare needs, necessary expenses, and desired lifestyle choices. Before retiring, it’s best to consider what your estimated budget will be so that you can create a plan to save and invest that amount. 

The Bottom Line: Start Your Early Retirement Planning ASAP

Early retirement is a noble goal that thousands of individuals pursue every year. After all, what’s not to like about a life of Saturdays? But it’s important to remember that when every day’s a Saturday, expenses can quickly scale to match – and that, especially over a decades-long time horizon, it’s often hard to predict one’s financial future.

All that said, provided you invest significant time upfront to planning and are smart about how you manage your spending and investments, who knows – early retirement and a life without alarm clocks may be in your future.

Tracking your finances is an important first step if you plan to retire early. Download the Rocket Money℠ app for free to get a view of all your accounts.