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Early Retirement: How To Retire Early And What To Consider Before You Do

Jamie Johnson5-minute read
April 09, 2021

Traditionally, the path to retirement looked for the same for most everyone. Most people went to college, entered the workforce in their early 20s, and then spent 40 to 50 years building their careers. Retirement typically happened once people reached their mid-60s to early 70s.

But times are changing, and many people think very differently about retirement than they used to. Some people aren’t interested in waiting and want to know more about how to retire early.

What Is An Early Retirement Age?

What’s considered early retirement age really depends on the individual and their career choice. For instance, it’s common for members of the military or civil service to retire at an earlier age.

But according to the Center for Retirement Research, the average retirement age for women is 62, and for men it’s 64.

The Social Security Administration allows retirees to start collecting benefits as early as 62. Your full retirement age depends on the year you were born. For instance, if you were born in 1960 or later, your full retirement age is 67.

But once you reach 62, you can begin collecting retirement benefits at a reduced rate. So if you were born after 1960, your $1,000 monthly Social Security benefit would be reduced to $700.

In comparison, Medicare benefits become available once you reach 65. You can apply for Medicare online up to 3 months before your 65th birthday.

There are certain IRS rules and retirement account provisions that will allow you to access retirement benefits early. For instance, if you are unable to earn more than a certain income due to disease or disability, you may qualify for Social Security or Medicare early.

And most retirement accounts do allow for early withdrawals due to unexpected financial hardships. However, if you withdraw the funds before the age of 59½, this may result in an additional 10% income tax.

What Is The FIRE Movement?

In recent years, a new trend has popped up that’s known as the FIRE movement. FIRE stands for financial independence, retire early. It’s a lifestyle that promotes financial discipline in order to retire early.

Many FIRE proponents aim to retire as early as in their 30s or 40s. If you’re interested in the FIRE movement, you can get started by figuring out your “FIRE number.”

This number is how much money you’ll need to retire and live comfortably on for the rest of your life. For most FIRE devotees, this is 25 times their annual income.

Once you know how much money you need to retire on, you can develop a plan for reaching your goal. Most people focus on paying off their high-interest debt, dramatically reducing their spending, and saving at least half of their take-home pay.

Many people also start a business to generate a form of passive income. Doing this will allow you to draw less money from your retirement savings.

How To Retire Early In 5 Steps

If you’re unsure of how to retire early, there are certain steps you can begin taking now to set yourself up for success. Listed below are five ways you can set yourself up for a successful early retirement.

1. Determine The Minimum Amount Of Money You Need

Depending on your current requirements and spending, the amount of money you need to retire can vary. It’s important to calculate what your annual retirement spending will look like.

This is the best way to accurately determine the minimum amount of retirement savings you’ll need. And don’t forget to plan for things like health insurance and taxes. You can save your money in an investment account, like exchange-traded funds, a Roth IRA, or real estate investment trusts.

2. Save Aggressively

It’s important to understand that most people who retire early live far below their means and save the majority of their income. Many people who are pursuing FIRE put 50% or more of their take-home pay in savings, retirement accounts, or investments. Aggressive saving is what’s going to allow you to hit your minimum retirement savings goal.

3. Cut Your Expenses

In order to save aggressively, you’re going to need to cut your expenses as much as possible. You’re not going to be able to build the kind of retirement savings you need if you’re living beyond your means. Try to cut down on your biggest expenses, which includes things like your housing costs, transportation and food.

4. Form Passive Income Channels

Many people who retire early do so by creating passive income channels that will sustain them in their later years. This could include things like an online business or rental income. And if you have passive income outside of your retirement savings, this means you don’t have to worry about living frugally just to get by.

5. Pay Off Debt As Quickly As You Can

And finally, you’re going to have a lot more money to work with during your early retirement if you get rid of all your debt first. Working hard to pay off your debt fast will make it easier for you to save and invest aggressively. Plus, you won’t have the added stress of trying to pay down your debt when you don’t have any income coming in.

Important Things To Consider Before Retiring Early

It’s important to understand that the FIRE lifestyle won’t be right for everyone. There are several things you should carefully consider before deciding to pursue early retirement.

Your Access To Benefits

Before retiring early, one of the biggest factors you’ll need to consider is how you’ll access health insurance. Many people get healthcare through their full-time job, so paying for it on your own can be a big adjustment.

How will early retirement affect the full scope of benefits that you would have had access to if you’d waited to reach full retirement age? This question is especially important to consider if you have a family.

Planning For Unforeseen Circumstances

If there’s one thing you can count on in life, it’s that unforeseen financial emergencies will arise. You may have health problems, your home could be damaged, or a number of other situations could arise that stretch your budget farther than expected.

So in addition to planning for your minimum retirement savings, it’s a good idea for early retirees to put together an additional emergency fund. This fund will give you added peace of mind.

What You Want To Do With Your Retirement Years

Most people like the idea of retiring early, but what are you going to do with all that additional time? Laying on a beach in Florida may seem fun at first, but it’s probably going to get boring at some point.

Fortunately, this is the fun part of retirement planning. You can arrange trips, learn new hobbies, spend more time with loved ones, and check items off your bucket list. And the more money you add to your retirement savings, the more freedom you’ll have to do these things.

Bottom Line

Retiring early won’t be the right choice for everyone, but it’s entirely possible if it’s something you want to do. Ultimately, the personal finance practices you’re cultivating today will affect your ability to retire early.

Figure out what your FIRE number is and begin the retirement planning process as soon as possible. From there, you can focus on cutting your expenses, paying down debt, and putting as much money in savings as possible. This will enable you to reach your goals and retire comfortably.

Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.