7 Tips on How to Retire Early

Retirement is in the eyes of the beholder. In a survey from the Employee Benefit Research Institute (EBRI), nearly one in three Americans said that they expect that they'll never retire, or will retire after age 69.² At the other end of the spectrum, there’s an entire movement dedicated to retiring early (even at the age of 30 or 40), which goes by the acronym FIRE (Financial Independence, Retire Early).³ Gallup pollsters have reported that the average American expects to retire at 66, though the actual retirement age is 61, on average, and that hasn’t changed much in recent years.⁴

Early retirement is a choice for some and a necessity for others, with reasons including family priorities, health issues, layoffs, career dissatisfaction, and lifestyle. Some plan to “retire” from the rat race but keep working at a different pace—to the beat of their own drum on their own passion projects.³

Whatever drives you, it’s a good idea to be prepared.

Early retirees may have to embrace a certain level of uncertainty given the shifting environment for social security, health insurance, long-term care, investments, taxes, and other weighty considerations.^5,6

Social Security can be part of the consideration, but it's not guaranteed to be a replacement for your prior income.⁷ And, the earlier you take your benefits—say, at 62 rather than at 66—the less you will get, according to the Social Security Administration.⁸

Among other considerations, early retirees may need to cover their own healthcare until eligible for Medicare at 65,⁹ though their costs and access are subject to change. On top of that, many see supplemental healthcare insurance as another potential cost to factor in to their retirement plans.

Adding even more uncertainty, investment portfolios are subject to volatility. Plus, property taxes, capital gains taxes, and other taxes can be the source of unpleasant surprises.

There are also common traps to avoid, such as a tendency to overspend in the first years of retirement or ignoring your credit score as you whittle down your spending.^10,11

Yes, retirement is complicated—and the earlier you retire, the more complicated it can be.

All that said, the more money you have stockpiled for early retirement—and the more carefully you spend it once retired—the less these complications matter. Below are a few high-level considerations on how to retire early.

Establish your budget. You should set the stage with a mock retirement budget, estimating in detail what you think you will spend on food, home repair, and other need-to-haves and want-to-haves for the lifestyle of your choice.⁵ Model budgets and first-person accounts by early retirees are readily available online.

Avoid debt. If you're planning on retiring early, experts recommend avoiding things like home equity loans or high-interest credit cards if possible.⁶ The money you spend on these could be put towards your retirement fund. Cheaper alternatives, like a used car instead of a new one, can help put more money away for the future.

Reduce spending – significantly. To retire early, you may have to reduce your spending significantly to be able to invest sufficiently. That could mean anything from downsizing into a smaller home to moving into a less expensive community to dispensing with a whole lot of nonessentials.⁶

Maximize compound growth. Investing in 401ks, IRAs, and other tax-advantaged retirement funds as soon as you start your career can help to maximize compound growth as well as any employer matching funds.⁵ (But remember: withdrawing any of it early could result in financial penalties.¹²)

With an investment of $6,000 a year and 7% annual return on investment, a person could expect to earn more than $800,000 in 35 years, according to the U.S. Department of Labor.¹