Early retirement is alluring. Imagine trading office buildings for Florida beaches, waking up to the smell of freshly brewed coffee instead of alarm clocks, and having the freedom to pursue your hobbies without the pressure of a traditional job.
While it’s fun to think about, the reality is that early retirement requires a significant amount of savings and careful financial planning.
Key takeaways
- 51 percent of retirees said a desire to do other things or to spend time with family was important for their decision of when to retire, according to a May 2024 report by the Federal Reserve.
- Meanwhile, 29 percent of retirees said that a health problem played a role in their decision of when to retire, and 16 percent said they retired partly to care for family, according to the Federal Reserve report.
- A large percentage of retirees (46 percent) leave the workforce earlier than expected, according to a 2023 survey by the Employee Benefits Research Institute.
- 57 percent of Americans in the labor force feel behind where they think they should be on their retirement savings, according to Bankrate’s Retirement Savings Survey, including 35 percent who feel “significantly behind.”
- Only 15 percent of working Americans say they feel ahead of where they should be on retirement savings, including 6 percent who feel “significantly ahead,” according to the Bankrate survey.
Why do so many people want to retire early?
Better question: Why wouldn’t someone want to retire early?
Some of the perks of retirement include:
- Pursuit of creative projects: If you’ve always dreamed of writing a book or picking up where that amazing painting elective left off in college, early retirement offers the perfect opportunity to pursue your passions.
- Spend more time with family and friends: A classic for a reason.
- Travel: Instead of taking off a few weeks each year, early retirement gives you more time to travel.
- Relax: The value of simply doing nothing can’t be overstated when it comes to retirement. For a lot of people, retirement isn’t about what they’ll do so much as what they plan not to do.
Everyone has their own reasons for stepping away from their 9-5. Some people want a more relaxed lifestyle, while others want to spend more time with family or explore their hobbies. For others, health concerns or a stressful workload might drive early retirement.
Regardless of your motivation, achieving financial independence at an earlier age requires proactive planning and a disciplined savings habit. Daydreaming at your desk won’t turn your vision into a reality.
To complicate matters, there are numerous obstacles on the path to early retirement. Inflation, unexpected expenses and market volatility can complicate or even derail the most thoughtful retirement plans.
Whether you actually take an early retirement or not, there’s a huge benefit to planning for an early exit: You’ll be prepared in case you have to retire unexpectedly due to an illness or family circumstance. If you don’t end up retiring early, at least you’ll have extra money saved up by the time you do leave the workforce.
Like the saying goes, aim for the moon. Even if you fail short, you’ll still end up among the stars.
How to plan for an early retirement: 7 steps you can take
If retiring ahead of time is a priority for you, here are seven steps you can take to make your retirement dream a reality.
1. Map out your retirement goals
Determining how much money you need to save for retirement depends on what you want your lifestyle to look like. There are no wrong answers when it comes to living your best life in retirement, but there are wildly different price points attached to each scenario. Before you can plan your path to early retirement, you need a clear idea of what resources you’ll need to support yourself.
Determine the age at which you want to retire and the lifestyle you envision. Consider factors such as housing costs, health care expenses and travel plans. This will help you calculate the amount of savings you’ll need to achieve your retirement goals.
You can also use Bankrate’s retirement calculator to estimate how much you’ll need to retire by your target age.
2. Know your numbers
Gaining a clear understanding of your current financial situation is essential to making a workable plan. This involves evaluating your income, expenses, assets and liabilities.
Are you planning to buy a house? Send kids to college? Go back to school? Identify any milestones or expenses that could impact your savings and investment plans during the years between now and retirement, and make sure these financial curveballs are factored in, too.
Once you’ve gathered this information, create a detailed budget. This will help you track your income and expenses, identify areas where you can cut back and save more for retirement. You can use financial planning software or budgeting apps to get a clear overview of your finances.
3. Create a retirement budget (or a few of them)
Coming up with a savings goal for retirement can lead to a number that simply feels too theoretical and overwhelming to be useful.
Take the time to create a monthly budget for retirement. Much in the same way you have a budget for your life now, you can create mock budgets to pinpoint what your spending could look like in retirement.
After all, people’s income and expenses typically shift in retirement. You’ll want to estimate how much Social Security income you’ll receive as well as a sustainable withdrawal rate from your retirement plans, such as your workplace 401(k) or an IRA. Remember, investments can be a significant source of income in retirement but can also fluctuate based on market conditions.
Likewise, you might spend less money on things like transportation in retirement — goodbye daily commute! — but health care costs tend to rise with age. And if you want to travel extensively, you’ll need to budget for that, too.
Don’t feel limited to just one budget — make several budgets that paint different pictures of what your spending might look like.
4. Maximize your retirement savings
Contribute as much as you can to your retirement plan, such as an employer-sponsored 401(k) or 403(b), and take advantage of any employer match. If you’re self-employed, consider a solo 401(k) or a Simplified Employee Pension (SEP).
Most retirement experts recommend saving between 10-20 percent of your income for retirement. But if you’re trying to leave the workforce early, keep in mind that you’ll likely need to set aside significantly more. After all, you can’t claim Social Security until age 62, so early retirees need to accumulate enough money to last five, 10 or even 20 years before a regular retirement paycheck kicks in.
While traditional 401(k)s and IRAs are popular, these tax-advantaged accounts impose early withdrawal penalties if you need to access the funds before age 59 ½. So if you plan to retire earlier, it can make sense to invest some of your money in a taxable brokerage account and wait to take withdrawals until your income drops after leaving the workforce. In 2024, the long-term capital gains tax rate is 0 percent if your income is under $44,625 for single filers or $89,250 for married couples filing jointly.
5. Figure out health insurance
An often overlooked aspect of early retirement is figuring out how to pay for health care. You’ll lose your employer-based health insurance, which could be a huge headache if other members of your family depend on that coverage. And you’ll only become eligible for Medicare, the federal health insurance program, once you turn 65.
You may be able to enroll in a plan through the federal Health Care Marketplace, join your spouse’s workplace coverage or use funds from a health savings account (HSA) to self-pay for expenses.
6. Talk to a financial advisor
Consulting a financial advisor for retirement planning is a smart move regardless of when you plan to stop working. But if you’re trying something unconventional like early retirement, it becomes even more critical to speak with an expert.
An advisor can provide personalized guidance and help you stay on track to reach your goals. Consider looking for an advisor who is a CFP, or certified financial planner. Bankrate’s financial advisor matching tool can help you find an advisor in your area.
7. Be prepared to make changes
No matter which scenario you choose, be prepared to make changes to your spending habits now to reach early retirement. There’s a reason few people retire early. For most people, pursuing early retirement means being laser-focused on hitting this goal, forgoing nonessential near-term spending and throwing every possible dollar into investments.
Stay flexible, and regularly review and adjust your plan as needed.
Bottom line
Early retirement is a marathon, not a sprint. It requires careful planning and disciplined financial habits. Stay committed to your goals, make informed decisions and get professional advice when you need it. By following the seven steps outlined above, you can increase your odds of achieving financial independence and enjoying a fulfilling retirement.
— Jessica Blankenship contributed to an earlier version of this story.
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