Depending on when you were born, your full retirement age — the age at which you can collect your full retirement benefits from the Social Security Administration — ranges from 65 to 67. However, with the rise of the FIRE (Financial Independence, Retire Early) movement, many people are making it their goal to retire well before their mid-60s. Retiring early might sound like a dream come true, but it takes a lot of preparation to be financially ready for it.
How can you retire early? To help you plan, we gathered the best advice from financial experts on how to make your early retirement dreams a reality.
Last updated: Sept. 23, 2019
Make Small Changes That Add Up Over Time
“One of the biggest lies we’re told is that financial freedom requires a six-figure salary and a lot of luck,” said Rob Berger, Forbes deputy editor and author of “Retire Before Mom and Dad.” “In truth, even small changes with how we spend, save and invest money applied consistently over time can put us on the path to financial freedom.”
Start Planning Right Away
Those wishing to retire early should get started on the process as soon as they can, said John Bergquist, senior founding partner at Common Sense Financial in South Jordan, Utah.
“There’s no time to lose if you want to comfortably retire at normal retirement age, let alone early, so you must act on your goal immediately,” Bergquist said. “Seeking help with this plan from a financial professional will also help a great deal, as they will help you realistically look at factors such as rates of return, inflation and the potential impact taxes could have on your goals.”
Determine What Kind of Lifestyle You Want in Retirement
Chris Hogan, the author of “Everyday Millionaires,” outlined several steps to early retirement on Dave Ramsey’s blog. The first step is to figure out what kind of lifestyle you plan on having once you retire.
“Before you do any calculations to determine how to retire early, you need to know what you think you’ll do in retirement,” Hogan wrote. “That dream will determine your budget. Want to travel the world? Then you’ll need a big budget. Want to travel to see grandkids? Open a business? Do volunteer work? Take the family on a huge vacation? Each of these dreams carries a different price tag.”
Figure Out Where You Want To Live in Retirement
Where you choose to retire — and what kind of housing you plan to live in — will greatly affect how much savings you’ll need. Be sure to ask yourself the following questions before you retire, Hogan advised: “Think about where you want to live. Is it your current location? Do you want to downsize? Which states have the highest cost of living? Which states offer the best tax breaks? Do you want to live close to family? You need to decide before you retire. An unplanned move after retirement can deplete your retirement savings.”
Decide If You'll Continue To Work Part Time in Your Retirement
Whether it’s for extra income, to scratch an entrepreneurial itch or to maintain social connections with co-workers, you might choose to continue working in retirement, Hogan noted.
“Do you want to retire completely? Do you want to work part-time and try to start your own business? Do you think you’ll miss the social interaction that work provides?” he wrote on the blog. “Think through these questions before burning your business connections. It’s your future — but you need to know how you want it to look!”
Figure Out Your Retirement Budget
Once you’ve figured out what your retirement will look like, Hogan wrote, you should create a mock retirement budget. Your monthly budget should include gifts and charity giving; utilities; insurance; medical expenses; food; phone and internet; clothing; gas; entertainment; home and car repairs; hobbies; savings for a new car, vacations and gifts; extras; and additional savings.
“Your budget will look different at different phases of your life, like when you drop life insurance and when you add long-term care insurance,” Hogan wrote. “It will also look different depending on what you want in retirement — travel, hobbies, volunteering, seeing family.”
Factor In Health Insurance Costs
“If you leave a job before you can get on Medicare, then you may need to get private insurance,” Hogan wrote on the blog. “That’s a huge factor to consider when you’re thinking about how to retire early.”
Keep in mind that, typically, people become eligible for Medicaid the month they turn 65.
Don't Be Reliant On Social Security
“You can’t count on Social Security to be a major source of income in retirement,” Hogan wrote in the blog post. “It’s just gravy on the biscuit. You’ll need to think through how you’ll budget with this knowledge in mind. And given the current rate of people retiring, you need to keep an eye on how much you’ll get. That will likely change between now and retirement time.”
Analyze Your Finances
Once you’ve figured out a realistic budget for your retirement, you need to analyze where you are now and where you will be financially by your target retirement age. Hogan offered a simple equation:
“Take your target retirement number (how much you need to save for retirement) and subtract how much you’ll probably have in your retirement portfolio — including investments, real estate, cash, and other assets — by the time you want to retire,” he wrote.
Make Lifestyle Changes To Meet Your Retirement Savings Goals
“Several actions could close the gap between the amount you need for retirement and [the] amount you’re estimated to have [at your target retirement age],” Hogan wrote.
These actions include getting out of debt, lowering your retirement budget and getting a second job. You might also need to push back your target retirement age.
Set Up a 'Bridge' Account
Once you know how much you need to have saved for retirement — and how much you need to save each year to get there — set up an account specifically to fund your early retirement. This should be separate from your 401(k) or IRA.
“If you want to retire early, the ‘bridge’ account will help you bridge the gap between when you want to retire and when you can take the money out of your retirement accounts,” Hogan said. “Once you’ve maxed out your 401(k) and IRA, you should open up a taxable investment account to serve as your bridge account. Be aware that you pay taxes on any money your account earns on these investments.”
Invest Every Extra Dollar
“You need to put every extra dollar you can toward investing if you want to retire early,” Hogan wrote in the blog post. “For example, if your typical vacation costs your family $5,000, you may want to cut that in half and put the other $2,500 toward investing. What if you could cut your grocery budget by $100 a month? That’s an extra $1,200 a year toward investing.”
Other places you could cut costs include clothing, entertainment, cable/satellite, haircuts, gym memberships and subscription services.
Have a Plan for Managing Your Income Streams
“An income stream is just a place you draw money from,” Hogan wrote on the blog. “Any savings outside of your emergency fund is an income stream. So are IRAs, 401(k)s, real estate and cash in your pocket. However, you need to know when you can take money out of each stream. You’ll get hit with a big tax penalty from Uncle Sam if you withdraw money too soon. You can also be penalized if you don’t take out money early enough.”
For IRAs, the minimum age to withdraw funds without a penalty is 59 1/2, and you must begin taking out the required minimum distribution beginning at age 70 1/2. The same rules apply to 401(k)s, though there are some exceptions.
Check In Often With Your Financial Advisor
Once you’ve set your financial goals and established your savings and investing accounts, you should meet with a financial advisor on a regular basis.
“I want you to be involved in your financial portfolio, and I want you to maintain control,” Hogan wrote in the blog post. “I just don’t want you to make a decision before you’ve talked it through with a professional who knows their stuff and has the patience to explain it.”
Reevaluate Your Retirement Dream Regularly
You might find that how you envision your retirement will shift from year to year. Be sure to check in with yourself regularly about your retirement goals.
“What are your expectations about travel? Hobbies? Giving? How do you picture your daily routine?” Hogan wrote.
If these priorities shift, you might want to reevaluate your financial plan for early retirement.
Automate Your Contributions
One way to ensure you stick to your savings and investing goals is to automate your contributions.
Find a Passion Project To Focus On in Retirement
On “The Dave Ramsey Show,” financial expert Dave Ramsey outlined his three-pronged approach to retiring by 40. The first prong in his approach is to figure out what you want to do with your free time once you’re retired.
“Have a goal of doing something at some point,” he said. “Prong No. 1 is, I’m going to start looking for that thing I want to do with my life […] something that’s fulfilling and gives me energy. Start working on it now.”
This can be your own business or another project you are passionate about.
Invest In 401(k) and Roth IRA Accounts for the Long Term
“You can’t use 401(k)s or Roth IRAs [right away] because you don’t have access to them without a penalty until 59 1/2, [but] I would use those as part of my wealth building,” Ramsey said on his show. “I am going to do 401(k)s and Roth IRAs for the longer term.”
Invest In Low-Turnover Mutual Finds
Since you can’t rely on the funds in your 401(k) or IRA as your main source of money when you retire early, “the portion [of retirement savings] you’re going to live out of […] is going [to be] mutual funds,” Ramsey said on his show. “You’re going to buy and hold them long-term. You’re going to pay taxes on them as they earn some portions of the income dividends and anything they sell so I’m probably going to lean towards a low-turnover mutual fund. A good way to get that is just an S&P 500 index fund. ‘Low turnover’ means they don’t sell the stocks inside of the fund very often, and if they don’t sell the stocks then there are no taxes on it until you cash it out.”
Ramsey said that if you save substantially into low-turnover mutual funds, “you should have a little bit of a nest egg to live out of.”
Max Out Retirement Plan Contributions While You're Still Working
“For clients with several years before retirement, it’s key to max out tax-sheltered retirement plans offered by an employer, such as a 457(b) or 401(k) plan,” said Amin Dabit, a certified financial planner and director of advisory services at Personal Capital. “Often, employers will match a percentage of the employee’s contributions — generally within 3% to 6% — so we encourage clients to contribute at least enough to get the full match. It’s essentially free money.”
Factor In Costs Related to Your Family Members
“Investors need to plan for their family members when considering retiring early,” Dabit said. “If a client is only planning for the finances needed to cover their own life expectancy, they haven’t considered the full picture. For example, if both spouses want to retire early, many considerations like age, expected expenses and healthcare costs need to be factored in. Working with a fiduciary financial advisor is the best way to ensure that these considerations can be sorted well in advance of early retirement.”
Don't Be Too Conservative in Your Investments
As you get closer to your ideal retirement age — and especially once you get there — you might be tempted to be more conservative with your investment strategy. This is a mistake, said enrolled agent Morris Armstrong.
“It is important to factor in inflation and realistic expectations for a portfolio return,” Armstong said. “A realistic return in real dollars would be in the 2% to 5% range, depending on the aggressiveness of the portfolio. You should not make the mistake of becoming too conservative in your portfolio just because you have retired. Inflation is like hypertension — it will damage you without your realizing it.”
Factor In Taxes Before You Retire
“You need to consider how taxes will impact your portfolio,” said Armstrong. “Many people save everything in a retirement account and pay taxes at withdrawal. This means that if you take $50,000 out of your IRA, you will need substantially more in order to pay taxes. Keep in mind that as your income goes higher, more of your Social Security becomes taxable. The best retirees seem to have separate buckets of money: taxable and non-taxable.”
Take Advantage of the 'Golden 55' Rule
“For those who wish to retire early, 401(k)s have a special provision that allows you to take a distribution without incurring the 10% penalty if you are 55 or older, and have separated from service,” said Ryan Repko, a certified financial planner with Ruedi Wealth Management. “This rule allows early retirees to access their money 4 1/2 years earlier than they can with a traditional IRA at age 59 1/2, without incurring the 10% penalty.”
Repko called it the “Golden 55” rule and said it “presents a unique planning opportunity to roll previous 401(k) plans into your current 401(k) plan [provided your plan allows it] to shelter as much money as possible for early retirement at age 55 or older. If you roll an older 401(k) into an IRA, you have permanently lost access to this money until age 59 1/2 [without another qualifying event] and without paying the 10% early withdrawal penalty.”
Pay Off All Your Debts First
“You aren’t retiring early if you owe thousands on your credit cards at [a] 20% [interest rate] or more,” said Howard Dvorkin, a CPA, personal finance expert and chairman of Debt.com. “Your very first step is to add up everything you owe, then figure out how to pay it back. Retiring early with anything more than a mortgage is downright dangerous, and my advice is to delay retirement until everything is paid off — including your home.”
Don't Do It
Personal finance expert Suze Orman has been vocal about her disdain for the FIRE movement.
“I hate it. I hate it. I hate it. I hate it,” she said on the “Afford Anything” podcast. “Listen everybody: I know you want to retire at 25, at 30, at 35. But as you get older, things happen. You get hit by a car. You fall down on the ice. You get sick. You get cancer. If a catastrophe happens, if something goes wrong, what are you going to do? You are going to burn alive.”
“I personally think it is the biggest mistake, financially speaking, you will ever, ever make in your lifetime,” she continued. “I think it’s just ridiculous. You will get burned if you play with FIRE.”
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Gabrielle Olya contributed to the reporting for this article.
About the Author
With eight years of experience working in the personal finance space at GOBankingRates, Jaime Catmull has amassed an extensive network of financial influencers and experts. Now, she’s tapping that network to get the real scoop on how you can live your best financial life and increase your wealth.