How to Retire Early in Six Steps

A fit, attractive middle-aged man poses while backpacking in the mountains.

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last updated 30 September 2024

Editor’s note: This is part one of an ongoing series focused on how to retire early and the FIRE (Financial Independence, Retire Early) movement. To see all early retirement articles, jump to the end.

It's not always the patient plodders who grasp how to retire early. Good things often come to those who wait, yet sometimes, better things come to those who act — like mustering the nerve to pursue a soulmate or secure an early retirement.

Amid discussions by some members of Congress and finance leaders to raise the retirement age, many intrepid savers aim to ditch the 9-to-5 grind way ahead of schedule. For them, 40 is the new 65.

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This aspiration resonates strongly with younger workers. A Qualtrics survey of 3,000 working Americans revealed that nearly a quarter of younger Millennials and Gen Z workers plan to retire early, with 41% of these hopeful retirees targeting to bow out by age 50.

How to retire early

Fueling this trend to quit while still relatively young? The FIRE (Financial Independence, Retire Early) movement, where influencers often document their journeys of retiring in their 30s and 40s. But, since early retirement is still far from the norm, many misunderstandings persist about it.

The truth is, the process is simple but not easy. If you’re eager to accelerate your transition to life after work, here are six key steps to retire early.

1. Set a high savings rate

Essentially, the higher the percentage of your income you save, the sooner you’ll be able to retire.

The average American, however, saves only about 4% of their earnings, a stark contrast to the 10-15% recommended by financial experts. T. Rowe Price’s analysis suggests that saving at the higher end of this range could help you accumulate 11 times your pre-retirement income by age 65.

Therefore, to retire early, this figure needs to be dramatically higher. FIRE enthusiasts often aim to save between 50-70% of their income, indicating that early retirement necessitates a profound shift in spending and saving habits for most.

To understand how your retirement savings compare to peers your age, read our articles on the average 401(k) balance by age and the average IRA balance by age. We also have tips on how to be a 401(k) millionaire.

2. Maximize your income

A lofty income isn’t a prerequisite for early retirement. Consider a survey by Empower that indicates Americans associate financial independence with an annual income of around $94,000.

However, the equation is straightforward: higher earnings facilitate greater savings.

You may be able to increase your income within your current career by working additional hours, seeking promotions or transitioning to a better-paying job. Beyond conventional employment, you can start a side hustle, look for freelance opportunities, or invest in assets that can generate passive income. You might consider tapping your home's value with a house hack, like converting your basement to an Airbnb apartment.

3. Control your spending

Creating a high savings stream also involves minimizing expenses.

Simple measures, such as reducing your streaming services, dining out less and canceling unused memberships, can significantly reduce discretionary spending.

For more substantial savings, consider larger expenses. The average household spends around $70,000 annually, a third of which goes to housing. So, exploring more affordable living arrangements or downsizing can offer greater financial relief.

While some may view such belt-tightening as restrictive, others embrace the simplicity and freedom of a minimalist lifestyle. This perspective is echoed by author and minimalist advocate Joshua Fields Millburn, who writes, “Now, before I spend money I ask myself one question: Is this worth my freedom?”

4. Invest wisely

Any retirement would be highly difficult to achieve without investing. To retire early, you may need to max out your employer’s retirement plan, individual retirement accounts (IRAs), health savings accounts (HSAs), and any other investment vehicles you use.

Within your investment accounts, you might allocate funds to stocks, bonds, mutual funds and other investments.

Investing a high percentage of your income every month — and starting to do that as early as possible — enables substantial growth in your savings, making early retirement achievable.

5. Plan carefully

Early retirement poses some unique financial planning challenges, including greater longevity risk.

How much do you need to retire early? The Rule of 25 offers a simple answer. Estimate your annual retirement expenses and multiply by 25. For instance, needing $80,000 annually translates to a savings goal of $2 million, allowing for a 4% annual withdrawal while preserving your capital.

While a 4% withdrawal rate might work for some, it may not work for others. Particularly for retirements beginning in one’s 30s or 40s and lasting 50 years. As a Vanguard paper points out, the 4% rule was based on a 30-year horizon. The paper’s authors suggest early retirees consider a dynamic spending withdrawal strategy. This allows investors to spend more when markets perform well and reduce spending when markets perform poorly, improving the chances your portfolio will survive retirement.

Additionally, early retirees must consider tax implications, penalties on early withdrawals from certain accounts, and healthcare coverage before Medicare eligibility at 65, all of which necessitate meticulous planning and potentially finding alternative solutions. It's also a good idea to learn how your state taxes retirees.

For retirees in government jobs, there are additional issues to consider. If you were a federal, state or local government employee who earned a pension on wages that Social Security did not cover, then the Social Security benefits you earned will be reduced.

For early retirees with a family, getting a solid estate plan in place before you retire is a must. It's one thing to make sure your income and health needs are covered, but quite another if you have children or a spouse who will need support in the event of your death. There are ways to save money on estate planning, so don't put it off.

Finally, remember that Social Security and Medicare will run out of money in 2033 if Congress doesn't act. Although that sounds dire, beneficiaries will receive less money, not zero money. Long considered the "third rail," or an untouchable entitlement, it's unlikely that lawmakers will let the trust fund lapse entirely. Still, they may raise the full retirement age or lower benefits to keep the benefits solvent, which could affect your early retirement planning.

6. Make sure it's right for you

Exiting the rat race as swiftly as possible is a dream shared by many. However, retiring early can require significant sacrifices and a commitment to austerity that many may find too challenging. Especially when observing friends and family embracing more affluent lifestyles.

Beyond the financial hurdles, finding fulfillment and contentment is challenging. What will you do to occupy all that time? Are your plans in sync with your spouse or partner? If most of your friends are still working, will you be lonely in retirement?

Researchers have found that some successful early retirees experience “feelings of emptiness and anxiety” and find themselves in a “constant search for labels to define their identity and purpose.”

Fortunately, the path to an early retirement isn’t irreversible. You may always decide to "unretire," and there’s no penalty for saving more. You can still retire right on time — whenever that is.