- 4-Minute Article
- Apr 24, 2018
5 Things to Consider If You Want to Retire Early
Consider these 5 factors to help determine if an early retirement is right for you.
Updated: November 23, 2022
- How can I retire early?
- How do I reduce debt?
- What do I do about health insurance if I’m not yet eligible for Medicare?
While 65 is commonly thought of as the standard retirement age, some people dream of retiring earlier than that. Whether early retirees hope to use that additional time to pursue passions outside their career or simply to enjoy more time for travel, family, or hobbies, early retirement requires careful consideration and planning.
Here are five factors to consider that can help make an early retirement achievable.
1. Desired retirement lifestyle
Lifestyle choices can have a big impact on retirement expenses. An early retirement filled with travel and expensive hobbies might require more savings compared to one focused on volunteering or part-time work.
Share a detailed vision of your retirement lifestyle with a financial professional, who can help determine estimated savings needs. It’s also important to consider the impact of inflation on future expenses – especially when planning for a retirement that might last 30 years or more. For instance, something that cost $100 about 30 years ago would cost $200 today.1
2. Strategy for accelerating savings
Early retirees have fewer working years to save, and they will need those savings to last potentially 40 to 50 years, versus a more typical estimate for a retirement that might last 30 years, based on average life expectancies.2 For that reason, an aggressive strategy to maximize savings can help meet an early retirement date. Potential approaches include:
- Making catch-up contributions to retirement accounts. IRS regulations allow people over age 50 to contribute extra money to their 401(k)s and IRAs. Those catch-up amounts were $7,500 for 401(k)s and $1,000 for IRAs in 2023, but the amounts can change from year to year.
- Saving additional money outside of traditional retirement savings accounts like 401(k)s and IRAs, which penalize withdrawals taken before the age of 59½. Investments such as stocks, bonds, and certificates of deposit (CDs) allow withdrawals without age restrictions.
Work with a financial professional to develop a strategy for boosting retirement savings while still having enough money to meet short-term goals.
3. Guaranteed sources of retirement income
Early retirees have unique needs to consider when developing an income strategy. They may have to wait to access certain income sources, as people under age 59½ can’t tap into savings from qualified retirement accounts such as a 401(k) without paying a 10% early withdrawal penalty (as well as income tax on their withdrawals). In addition, people under age 62 can’t claim Social Security benefits, and those who claim Social Security before full retirement age (which ranges from age 66-67, depending on birth year) will receive a smaller monthly benefit.
Drawing on savings earlier and for a longer duration may increase the risk of outliving retirement savings, known as longevity risk. To help work around these factors, people planning an early retirement may want to consider additional income sources to help cover expenses. Some approaches include:
- Turning a hobby or passion into a side business for additional income, or pursuing part-time work in an area of interest.
- Putting a portion of savings into an annuity. Early retirees could begin collecting guaranteed income right away with an immediate annuity , or use a deferred annuity to begin providing income on a future date of their choosing. Some annuities offer guaranteed lifetime income payments, which means payments will continue as long as you live, no matter what. Learn more about how guaranteed income can help overcome common retirement concerns here.
4. Amount of debt
Eliminating as much debt as possible before retirement frees up cash flow that can be used to cover other expenses. People considering early retirement should examine whether they can afford the same level of monthly debt payments if they have less monthly income once they stop working full time.
For those who need help reducing their debt load, here are a few options:
- Consider paying off higher interest debt, such as credit cards.
- Consider paying off a mortgage ahead of retirement. The average American spends 33% of their annual pre-tax income on housing,3 so eliminating that debt can reduce expenses significantly. Alternatively, with mortgage interest rates reaching historic lows in 2020, refinancing a mortgage could translate to significant savings on housing expenses.4
- Consult a financial professional to help develop a personalized debt management strategy.
5. Coverage for medical costs
Health care planning is also slightly different with an earlier retirement date. Many early retirees are no longer covered by employer-sponsored health insurance plans, but may be too young to qualify for Medicare. However, there are ways to help bridge potential health insurance coverage gaps.
For those with employee-sponsored health insurance, COBRA benefits allow employees to keep their health insurance for the first 18 months after leaving a job. COBRA can be expensive, though, as employees must pay for all of their monthly premiums (including the amount the employer used to cover) plus a 2% administration fee.
You can also get health care from the Health Insurance Marketplace, which was established through 2010’s Affordable Care Act. You can typically enroll during a Special Enrollment Period lasting 60 days before through 60 days after a loss of job-based health care. Learn more about options for retirees here.
People who choose a high-deductible health insurance plan also might qualify for a health savings account (HSA), which allows account holders to make contributions until age 65 that grow tax-free – plus funds can be withdrawn tax-free to pay for qualified medical expenses. Once HSA owners reach the age of 65, these funds can be used for any expense without penalty (however, withdrawals for non-medical expenses will be subject to income taxes).
Choosing the right retirement date depends on a range of factors, but considering these factors can help determine whether an early retirement is a viable option. If early retirement sounds appealing, a financial professional can help craft a detailed plan to help achieve that goal.