How to retire early: 5 tips for early retirement
December 13, 2022 7 min read
Is the idea of working until you’re 75 bringing you down? If you’d rather travel, spend time with your family or volunteer, you’re not alone.
Retirement means different things to different people—and there’s no one right or wrong way to approach it. Regardless of your reasons, being able to retire early starts with making a plan.
Read on to learn some tips that could help you achieve your dream of early retirement.
- According to the Department of Labor, the average American spends 20 years in retirement.
- Investing strategies—like the 4% Rule—can make it easier to estimate early retirement savings goals.
- A person can claim Social Security retirement benefits at age 62. But if they wait until they’re 70, they could claim the maximum monthly benefit.
- A retirement budget could help break large savings goals into smaller monthly chunks.
1. Refine your vision for early retirement
There’s no one-size-fits-all approach to retirement. That’s why it’s so important to define what your version of retirement looks like. Knowing how your current money situation relates to your financial goals could help you shift your spending and savings habits.
Think about your reasons for wanting to retire early. How do your goals and passions factor into your retirement plans? For instance, you may want to step away from the corporate world and relocate to your favorite destination spot. Or perhaps you want to pursue your favorite hobby or learn a new skill.
It’s also helpful to consider how you want to spend your time in retirement. Do you want to completely step away from work so you can travel? Or will a part-time workload free up your schedule so you can spend more time with your family?
Last but not least, consider the retirement lifestyle you want to enjoy. Are you comfortable with cutting corners and reducing your spending? If not, you’ll likely need to save more aggressively than someone who’s fine being frugal.
2. Set a savings goal
As a general rule, experts recommend saving 10 times your annual income in order to retire at 67. But if you want to retire sooner, you’ll likely need to save more than this amount. Not sure what your savings target should be? Learning about the Financial Independence, Retire Early (FIRE) movement might be a good place to start.
Followers of the FIRE lifestyle focus on investing a large portion—often up to 75%—of their income so they can retire in their 30s, 40s or 50s. Calculating their FIRE number is one step people take to reach these retirement goals.
A FIRE number represents the amount of money a person needs to achieve financial freedom. Even if you don’t follow this movement, finding your FIRE number could help you create a financial plan for early retirement.
How to calculate your FIRE number
The 4% Rule is a common method followers use to calculate their FIRE number. According to this rule, you could live on 4% yearly withdrawals from your retirement savings for 30 years. But you’d need to save 25 times your annual expenses for this strategy to work.
You can use the following formula to find your FIRE number:
Annual expenses × 25 = FIRE number
Let’s say your yearly expenses total $40,000. You would multiply that number by 25 and your FIRE number would be $1,000,000.
While the 4% Rule does take inflation into account, there could be other costs you need to consider. If you wanted your retirement to last longer than 30 years, you’d need to adjust the amount you save accordingly.
It’s best to think of the 4% Rule and your FIRE number as a benchmark. That’s because increased health care costs, lifestyle changes and income changes can influence your retirement budget and planning process.
3. Don’t forget fixed income earnings
It’s also helpful to know if you’re eligible for any fixed income sources. Having an idea of when you could receive these payments and how much you could get can help you build an early retirement budget.
According to the Social Security Administration (SSA), retirement income typically includes:
- Social Security benefits
- Pension payouts
- Personal savings and investments
For example, you might be able to collect Social Security benefits when you turn 62. But if you wait until the normal Social Security retirement age—which is between 65 and 67—to claim benefits, your payouts could be up to 30% more.
A pension plan is another fixed income source to consider. Some employers offer this type of guaranteed retirement benefit to employees. If you expect to receive a pension, it’s helpful to know how your plan pays out. Most people receive fixed monthly payments, but some plans may offer a lump sum payout. As with Social Security, though, you’ll probably have to wait until a certain age to collect your pension.
4. Develop a savings plan
A budget is a great resource during the early retirement planning process. Having one can also help you manage your money once you’re retired.
First, you’ll want to review your current financial situation. Pay close attention to details, such as:
- Monthly income
- Housing costs
- Food, travel and entertainment expenses
- Transportation costs, including gas, auto loans and car insurance
- Additional debts, like student loans
- Health insurance costs, since Medicare eligibility doesn’t start until age 65
Understanding your current habits can give you a better idea of how you might spend money in retirement, and how much you may need. Even if you think you’ll spend less once you’re retired, using your current habits as a budgeting baseline can help you build a buffer for unexpected costs.
How to calculate your monthly retirement savings goals
Saving enough money to retire can seem like a big goal. Breaking this money milestone into smaller monthly chunks can make the process more manageable. Budgeting your next vacation, for example, could be a good place to start.
For example, if someone needs to save $500,000 to retire in 20 years, they can divide $500,000 by 240 (20 years × 12 months per year) to determine their monthly savings target of $2,084.
Once you know your monthly savings goal, you may find that you need to cut back on expenses or increase your income. Some early retirement hopefuls focus on paying off debt, downsizing to a smaller home or starting a side hustle to save more money.
5. Stick to your plan—but make it flexible
Retiring early takes focus, so it’s helpful to check in on your progress regularly and make adjustments as needed. Using a financial planning tool could help you track spending habits or monitor your saving and investment progress. You may even consider working with a financial advisor to develop a sustainable plan that aligns your current budget and lifestyle with your financial goals.
But no one knows exactly what the future has in store, so even the best plans need room for flexibility. You may need to adjust your savings strategy as your family grows or in the event of a promotion or layoff.
The key is to be consistent with the things you can control, like spending habits and recurring expenses. And taking steps to prepare for the unexpected—like building an emergency fund—can help you handle life’s surprises.
Early retirement FAQs
Do you need a retirement plan to retire early?
Having a plan is a key part of early retirement planning. Experts recommend that you start by estimating your post-retirement expenses. With this number in mind, you can break down your savings goal into monthly chunks. While every investment has its risks, contributing to retirement accounts—like a 401(k) or a Roth IRA—is one strategy that may help you reach your savings target.
What age is the earliest to retire?
The SSA defines early retirement as any age before 67. But you can technically retire at any age.
Is retiring at 55 considered early?
The average retirement age for Americans is 62. By this standard, retiring at 55 would be considered early. Retiring at 55—or even earlier—may be possible. But keep in mind that you may not be able to access money from fixed sources—like Social Security or a pension—for several more years.
How much do I need to retire at 55?
There are a few different ways to determine how much money you might need to retire early.
Some financial experts believe retirees should plan to spend 80% of their pre-retirement income per year. So, if your annual salary is $100,000 per year, you’d need $80,000 for each year of retirement. If you plan to retire at 55 and spend 30 years in retirement, that would mean saving and investing $2.4 million.
The 4% Rule is another way to find your money target. You can multiply your yearly expenses by 25 to find a starting point for your retirement savings. For instance, if you spend $50,000 annually, you might need to save about $1.25 million before you retire.
Retiring early in a nutshell
Early retirement is possible, but it helps to have a plan—and a lot of discipline—to get there. Reviewing your current financial situation can help you identify ways to cut expenses and save more money. Once you’ve got a better idea of your finances, remember to include any fixed income sources you might receive in your early retirement plan.
Want to learn more ways to manage your money and financially prepare for the future? You can read about how to create a budget that works for your lifestyle and goals.