How to retire early: 8 key steps

Early retirement is possible, even in today’s economy. However, it will probably require some major adjustments to your current lifestyle, as well as a deep dive into your money mindset. Prepare to increase savings, reduce spending, and create strategies that are more fit for long-term goals.

So, if financial independence at an earlier age is a goal, use these steps below to learn how to retire early. 

1. Think about your desired retirement lifestyle and calculate expenses

Take some time to truly think about what you want your retirement to look like. Will you be settled in a small house? Will you travel the country in an RV? Will you explore new hobbies and interests? What will an average day look like? All of this will affect how much you’ll need to save for retirement.

Some of your primary expenses in retirement will include housing, food, transportation, healthcare, and personal expenses. Consider these expense categories, add up some of your predictions, and get a basic idea of how much money you need to retire.

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2. Assess your current financial situation and set your savings goals

Take a look at your current income and expenses. If you’re barely making enough to cover your bills now, you may need to consider ways to bring in additional income. If you’re spending most of your money, alter your money mindset to focus more on saving. 

Based on your estimated retirement expenses, set a retirement goal and create a plan for how to reach it. Perhaps you can set aside a certain amount each week or month. You can also take some extra steps, such as setting up a high-yield savings account or investing.

3. Maximize contributions to retirement accounts

Retirement accounts have annual limits that you cannot exceed for contributions. In 2024, you can contribute up to $23,000 in pre-tax dollars to a 401(k) and up to $7,000 to an IRA. Consider getting as close to these limits as possible.

If you can’t hit these maximums, calculate how much you need to contribute to your employer plan to take advantage of any match programs. On the other hand, if you're comfortably hitting the maximums, some employers allow after-tax dollar contributions, which lets you exceed the maximum annual contributions.

4. Make informed investment decisions for long-term growth

A brokerage account can help you build a diverse portfolio for more opportunities to build your retirement nest egg. When choosing investments, assess risk and evaluate whether it fits into your long-term goals. If you’re not comfortable taking on this task alone, many brokerage accounts offer management services where a financial professional can help you make investment decisions.

5. Consider a health savings account (HSA) for health expenses

A health savings account (HSA) is an investment account specifically for paying for future medical expenses. You can contribute pre-tax dollars to your HSA and save for things like deductibles, copayments, prescriptions, dental and vision, and other qualifying medical expenses. An HSA can help you avoid eating into other savings or your emergency fund.

6. Pay off debt or reduce it considerably

If you’re still in debt during retirement, monthly payments can take away chunks of your retirement savings or income. True financial independence will come from a combination of sufficient income or savings with little to no debt.

Assess your current debt situation and create a plan to reduce or pay off your debt. Consider paying more than your monthly minimums, consolidating debt, or refinancing high-interest debt. Even if you have to start by taking baby steps to improve your credit score, it will be worth it in the end. 

7. Create a practical budget for retirement and reduce living costs

While you can do your best to build up your retirement funds, as well as build streams of income for the future, you’re likely going to have less money coming in during your retirement years than you do in your working years. 

Based on what a comfortable retirement looks like for you, start by creating a simple budget. This can help you see areas where you can improve your spending habits or where you might need to cut back to make your retirement plan more realistic.

8. Explore additional income sources in retirement

Your main sources of income in retirement are likely to be Social Security and payments from retirement accounts. However, you might consider making additional investments now to improve your retirement income in the future. For example, dividends from stocks, payouts from certificates of deposit (CDs), maturing bonds, and some life insurance accounts can all provide various streams of income. 

FAQs on how to plan for early retirement

What is a good age for early retirement?

There is no one-size-fits-all age for early retirement. It will depend on many factors, like your current financial situation, long-term goals, and lifestyle preferences. It’s important to find balance when choosing a retirement age because you want enough time to save but enough time to enjoy the savings.

What is the 4% rule for early retirement?

The 4% rule states that you should withdraw 4% of your retirement account in the first year of retirement. Each year after that, take the same amount adjusted for inflation. This is meant to give you enough annual income while leaving enough in your account for the future.

How much do I need to retire at 40?

To retire in your 40s, you need a substantial amount of savings. By retiring at 40, you’re adding on at least 20 years to the typical retirement age. Calculate your living expenses for these additional 20 years and add that to your standard retirement savings goals.

How much do I need to retire at 55?

Retiring at 55 is not impossible, but it will take some extra savings. You won't receive Social Security benefits until age 62, so you need to adjust your savings and income to cover living expenses until then. This will be in addition to the amount you may still need after 62. You can use the steps above to learn how to retire in your 50s.

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