How to Retire Early: Take These Steps to Get There

Have you ever dreamed of ditching the daily grind? If you’re wondering how to retire early, these retirement experts have answers.

For years, AJ Borowsky had his sights set on retiring early at 50. Although he enjoyed his career as a network television editor and manager, he dreamed of the day he could finally hang it up. Instead of just thinking about it, Borowsky and his wife, Julie Vila, focused on earning extra money to make that goal a reality. They bought vacation rental properties and a massage and facial spa, operating both while working full time. Finally, after 25 years in the workforce, he was able to call it quits—at age 48, no less.

The way that Borowsky and Vila did it may not work for everyone. Experts agree that the ability to retire early depends on a lot of factors, including how much you save and invest, how much you currently spend and plan to spend in retirement, and how much you earn now.

There’s no one answer to the question: How can I retire early? But by thinking through your financial plans and outlook, you can determine what may be realistic for you when it comes to early retirement. Here are the top considerations and tips from financial professionals on how to retire early:

Estimate your retirement timeline

Your first step is to decide when you want to retire. A shorter time frame means you have to save and invest more aggressively.

“Retiring early means you will have more years of expenses that need to be covered by savings,” says Theresa Morrison, CFP®, a financial advisor in Tucson. “This necessitates a bigger nest egg.”

In order to determine just how big of a nest egg you need, determine when you hope to retire. For example, if you want to retire at age 40 and you’re already 30, you’ll need to plan differently than if you’re 20 and aiming to retire at 55.

Once you know when you want to start your retirement, consider how long it might last. Think back on the retirements of your parents, grandparents and even great-grandparents. Their lifespans may help give you a ballpark estimate of your own, Morrison says.

How many years do you have to work to retire?

The answer to this question will depend on how long your retirement will be and how aggressively you save to get there. Morrison recommends thinking about the length of your retirement as your “freedom term.”

Check out these tips from financial professionals on how to retire early.

Rather than saying you need a specific amount of money to retire at a certain age, a freedom term defines how long you can go without income, Morrison says. In other words: “If you stop working for whatever reason, your assets can support you for X years at your current level of spending,” she explains.

Morrison says many people find this easier to wrap their head around than a target retirement date, as it’s more tangible. Plus, “it’s not just a dollar number,” she says. “It is years of your life.”

Once you have a good idea of how much money you’ll need in retirement, you can use a retirement calculator to estimate how long your retirement funds will last based on your age, annual household income, current savings rate and other key factors. Given your projections, are you saving for early retirement enough to stop working at your target date and have your funds last throughout retirement? This will inform your decisions around how to retire early.

Determine how much money you’ll need each year in retirement

Determining how much you’ll need annually to live comfortably in retirement involves making a retirement budget.

“You need to have some estimate of what you’re going to spend so you know what you need to save,” says Matt Hylland, a financial planner in Cedar Rapids, Iowa. For example, someone who wants to retire early to live in New York City and travel the world in luxury likely needs to save more than someone planning a quieter retirement on a ranch in Oregon.

Hylland recommends you start by looking at what you are spending today to figure out how to retire early. “We find that it is rare that early retirees spend significantly less once they are retired than when they were working,” he says. Pull up your budget and your bank account statements to determine what your monthly costs are now.

From there, you’ll want to account for inflation. “Even with modest 3% inflation, $50,000 in purchasing power today will require over $90,000 20 years from now,” he says. “If you are only planning on $50,000 in expenses 20 years from now, but end up needing $90,000, your plan will be at risk.”

Be sure your projected expenses include not only the basics such as housing, food, transportation and travel, but also taxes and health insurance, Hylland says. Looking at health insurance in particular is important because you’ll likely lose your employer-sponsored coverage when you retire, and you may not qualify for Medicare until age 65. A health savings account is one option to consider in order to cover out-of-pocket healthcare costs.

Health insurance was one reason Vila decided to keep working, rather than retire alongside Borowsky. She’s able to work remotely at her corporate job, maintaining their employer-sponsored health coverage while continuing to boost their savings.

Retiring early means you will have more years of expenses that need to be covered by savings. This necessitates a bigger nest egg.

Theresa Morrison, CFP®

What are early retirement considerations around Social Security?

After you estimate your expenses in your early retirement plan, you’ll want to consider sources of income during retirement—in particular, Social Security benefits. “Depending on your work history, retiring early could mean a big reduction in your Social Security benefits,” Hylland says. Estimates on your Social Security statement assume you’ll continue making your current salary until you start withdrawing benefits. When you’re no longer earning income, you are no longer contributing to Social Security, and you’ll receive less when you retire, he explains.

Try using a Social Security benefits calculator to get a sense of how Social Security can impact how much you need to save for early retirement.

“A little planning here can go a long way to making sure your assets will last through retirement,” Hylland says. 

If that planning results in you finding your funds will run out earlier than you were hoping for, that’s okay! There could still be time to make the adjustments necessary to get on the right track. Here are the key steps to take:

How to put your early retirement plan into action

Whether you’re looking to catch up on saving for early retirement or are just starting out, there are tried-and-true strategies you can follow. Even with modest starting salaries, those in their 20s and 30s can take advantage of compound interest by saving as much as possible, Morrison says.

Here are some tactics you can take as you determine how to retire early:

Increase your income

One of the most straightforward ways to strengthen your early retirement plan is to boost your earnings. For Borowsky, that meant focusing on getting the highest possible salary while generating income through rental properties and his massage business.

Tackle student debt

If you have student debt, Morrison recommends paying it off as quickly as possible. That might mean smaller retirement account contributions, but you can boost those once the debt is repaid. “A split strategy (paying debt quickly and also saving) eliminates the ability of debt to work against you while starting the ability of growth compounding to work for your future,” she says. In other words, this prevents you from paying excessive interest on your student loan debt.

Tackling your debt while you save is key to your early retirement plan.

Find ways to spend more intentionally

Some people saving for early retirement look to the Financial Independence, Retire Early movement, or the FIRE retirement plan, which involves saving aggressively and spending intentionally both before and during retirement.

Kick off your journey to spend wisely by reviewing your checking account and credit card statements and see where your money is going. Morrison’s approach is to have her clients break down their current costs into three buckets: minimum survival, sanity and style.

The minimum survival bucket includes staples like food, clothing, shelter, transportation, insurance and health care. The sanity bucket funds lifestyle choices like a comfortable apartment, along with expenses like dining out and entertainment. (Morrison says the bulk of most people’s money goes into the sanity bucket.) The style, or luxury, bucket is for the finer things in life. If you can afford them, items in this bucket include things like sports cars, expensive vacations and jewelry.

Categorizing your spending can help you proactively choose where to spend and where to be frugal in order to save money for retirement. “By creating a distinction between sanity and style spending, you have more control over your spending because you have more clarity on where it fits within your personal values,” Morrison says.

Using this three-bucket framework, Morrison’s clients are able to find places to cut back their spending so they can free up funds to go toward saving for early retirement.

Open an HSA

Both Morrison and Hylland recommend opening a health savings account (HSA), if you’re eligible. “It’s a great savings vehicle for people who want to retire early,” Hylland says. You fund an HSA with pretax income, allowing your dollars to stretch further to cover medical expenses.

Morrison recommends establishing and building up an HSA before you retire and then using those funds for healthcare costs during retirement.

An HSA has a triple tax advantage, Morrison explains. Not only are contributions pre-tax, earnings on your investment are tax-free as well, along with medical withdrawals. She notes that it’s a practical alternative to long-term care insurance.

“When used in retirement, paying for medical expenses with HSA money is more efficient than using other retirement assets,” Morrison says.

In addition to these benefits, account funds roll over yearly if unused and don’t expire, even if you change jobs or retire, Morrison says.

Even with modest 3% inflation, $50,000 in purchasing power today will require over $90,000 20 years from now. If you are only planning on $50,000 in expenses 20 years from now, but end up needing $90,000, your plan will be at risk.

Matt Hylland, financial planner

Fund your 401(k) for your later years in retirement

If you can afford it, Morrison recommends devoting 30% to 35% of your salary to maxing out retirement accounts. For many savers, the 401(k) is their primary savings vehicle, Hylland says, especially if they have the benefit of a company match.

That said, you typically can’t withdraw money from a 401(k) until you’re at least 59½ without paying a costly penalty and taxes. “If you want to retire at 55, that’s almost five years when you need money outside the 401(k), if you want to avoid the penalty,” Hylland says.

Given that, you’ll want to pair your 401(k) with other early retirement plan strategies, as well.

Consider a Roth conversion

Since you can’t withdraw funds from a 401(k) until you’re nearly 60, you may want to consider Roth IRAs and Roth conversions in your early retirement plan, Hylland says. That’s because the contributions can be withdrawn without taxes or penalties. (They were already taxed as contributions.)

Those whose income is too high to contribute to a Roth IRA can convert a Traditional IRA to a Roth IRA, paying the tax at the time of conversion, Hylland explains. They can then withdraw the initial contribution amount without penalty, but must wait five years before doing so, Hylland says.

Consider a brokerage account

Another good option is a taxable brokerage account, which may provide you easier access to your money in early retirement, Hylland says. He explains that this is an investment account where you can buy, hold and trade stocks, bonds and mutual funds. Unlike 401(k)s, taxable brokerage accounts may be accessed at any time without penalty, he adds.

“Taxable brokerage accounts are very flexible,” Hylland says, as people can take money out when needed, with no age requirements. You will need to pay taxes on capital gains, but if your income is below the current $80,000 annual threshold, you may be exempt from those taxes, he adds. You’ll want to review your personal situation with a financial planner to see if this applies to you.

Monitor and adjust your early retirement plan as needed

When they work with clients to develop an early retirement plan, financial planners use various models to anticipate future needs. They also make a point to factor in strategies to protect your retirement savings from recession and stock market volatility.

When you’re saving for early retirement, it’s important to monitor and adjust your plan as needed.

 If, for example, you see that your saving for early retirement is not on track, you will want to reevaluate your spending. “That’s where the minimum survival, sanity and luxury buckets come in,” Morrison says. “If you know what those are when times are good, you’ll know immediately what expenses to cut first and second” in a downturn. That way, savings can be left intact.

Once you make it into retirement, congrats! But be sure to continue your diligent monitoring of expenses. Borowsky keeps a close eye on where his money goes, comparing spending on a monthly basis. “Lifestyle inflation after retirement is much more dangerous than while you’re working,” he says. With this in mind, he learned they were spending too much money at their favorite craft breweries. They cut back on dining out in response.

If you’re thinking about following in his footsteps, take the time now to reflect on your motivations first. Then you can determine the action plan to make it happen.

“To retire early, you need to wholeheartedly know why you want to retire early and how you are going to spend in order to achieve that,” Morrison says.

Intrigued by the prospect of early retirement? Learn more about how to calculate your own retirement needs.

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