Here's How to Know if You're Ready for Early Retirement

Many people dream of early retirement but aren’t sure when it’s the right time. Here’s how you know you’re ready to retire early.

How to Know if You're Ready for Early Retirement
Updated May 28, 2024
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Early retirement has become something of a buzzword as an increasing number of people consider giving up the 9-to-5 grind sooner than their parents.

In fact, according to a FinanceBuzz survey on early retirement, most respondents said they’d like to retire at age 50 or 55, as opposed to a more traditional retirement in their 60s. Many respondents said they’re even willing to give something up to make it happen. Twelve percent said they'd forgo having children and 11% said they'd give up their pets if it meant they could retire a decade earlier.

If you’re thinking about retiring early, how do you know if you’re on the right track? Have you been saving for retirement? Do you need to understand more about how to invest money?  Here are some signs you’re on target for early retirement.

Your debts are paid off

Understanding how to pay off debt is one of the most important items to tackle before you can achieve early retirement. Although you don’t need your debt completely paid off before retiring, you should be well on your way, with a relatively small amount of debt remaining. With your debt paid off (or almost paid off), you have more financial flexibility and fewer obligations draining your income during your retirement years.

If you still have debt, your next move is to create a debt reduction plan — you can try either the debt snowball method or debt avalanche method — to put you on track for early retirement.

You have plenty of money in savings

Review your savings. Do you have enough money to meet your retirement lifestyle goals? The way you want to live has a lot to do with whether you have enough money saved.

If you plan to live in an area with a low cost of living and take a couple of trips per year, you might not need a huge nest egg. On the other hand, if you want to live in an expensive city and take up a high-cost hobby, you’ll need much more socked away.

If you’re behind on this early retirement milestone, consider opening up a high-yield savings account to help you set aside money and get caught up.

You know how much you’ll be getting from your investments

Knowing your monthly income is an important part of preparing to retire early. Calculate how much money you generate each month from your savings, including your IRA, 401(k), pension, taxable investment accounts, and other assets.

Realize, too, that if you’re younger than 59 1/2, you won’t be able to tap into your tax-advantaged retirement accounts without paying a penalty. There are some exceptions to that rule, especially if you’re at least 55, but you should review your situation and come up with a withdrawal plan that relies on your taxable investment accounts until you can access your IRA or 401(k) money.

Also consider how to earn money in retirement. Things like a weekend side job or rental property can help you with cash flow without dominating your time. Make sure you have enough coming in each month to cover your expenses and meet your lifestyle goals.

You can live on your budget

Have you practiced living on your retirement budget? Once you have a handle on your cash flow situation, make sure it really is adequate. Practice living on your retirement budget for six months to a year before you actually take the early retirement plunge. Put income from your job, in excess of your retirement budget, aside to pay off debt faster or to build your savings.

Pay attention to the number of times you have to go beyond your retirement budget. If you can’t stick to your budget, you might need to tweak your numbers and save for a little longer before retiring or figure out what needs to be cut from your expenses so you can retire on schedule.

You know what to do in an emergency

Unexpected costs can derail your plans, no matter where you are in life. Do you know what to do if the market crashes? What would happen if you end up in the hospital unexpectedly? Create a plan for dealing with economic downturns and other emergencies so your retirement finances are prepared. You can start by building a dedicated emergency fund.

Sometimes you may need to be ready to go back to work — at least part time — to cover a temporary setback. Know how you will react in that circumstance and have an idea of how you can proceed if it becomes necessary.

You have health insurance coverage

Health insurance can be one of the biggest retirement costs, so you need to have a plan for this if you want to retire early. You won’t be able to get Medicare if you retire before age 65, so you need to be ready. For those who enjoy work but want to do something different, it’s possible to find part-time jobs with health insurance.

You can also check with your state’s health insurance exchange to buy coverage, or use an insurance broker to help you find an appropriate health plan. Consider using a Health Savings Account to help you plan for medical costs. These tax-advantaged accounts can be a great supplement as you plan your health insurance.

You have a plan for what you’ll do in retirement

Few people are actually happy lying around, doing nothing. Whether you pick up a new hobby, start a business, work part time, volunteer for a cause you love, or travel the world, you need to have a purpose.

Knowing how you’ll spend your retirement years can also help you maintain a strong social network. It’s a good idea to have friends and support systems to provide you with the emotional support you need. Many people find, after they retire, that all their friendships were connected to their work — and they become lonely.

If you have a life partner, you also must agree regarding your vision for retirement. Even if your partner doesn’t retire exactly when you do, it’s important for you to have a plan for how to manage your schedules and achieve your ideal lifestyle.

If you’re considering early retirement, consider what you’ll do with your newfound time and start building a social network that isn’t entirely reliant on your 9-to-5 job. Working toward these goals can help you maintain your emotional and mental health after retiring early.

What to do if you want to aim for early retirement

  • Pay off debt. Reduce your obligations so they don’t weigh you down later.
  • Build your nest egg. Make sure you have enough money to support your lifestyle goals and manage your cash flow.
  • Know your budget. Create a realistic retirement budget and make sure you can stick with it.
  • Manage your income sources. Understand where your money is coming from and make sure the cash flow meets your needs.
  • Have an emergency plan. You still need to know how you’ll respond to an emergency, even in retirement. Make sure you’re ready for potential setbacks.
  • Get health coverage. Even if you get it on an exchange or through a part-time job, you need health insurance.
  • Stay busy and connected. Create a social network and have a plan for meaningful activities to help you maintain emotional and mental health.

Bottom line

For many, early retirement is a goal that provides hope for the future. But actually retiring early requires planning and thought. If you haven’t thought about it yet, take a step back and consider when you want to retire and what it would take to achieve that goal. Then, get to work.


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Author Details

Miranda Marquit

Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.