Early Retirement 101: New Rules and How You Can Achieve It

35 is the new 65.

Updated May 13, 2024
Fact checked

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

A lot of people are talking about early retirement right now.

And why not? It’s an enticing thought and it’s good to hear about people out there actually achieving it. But if you’re like me, you’re probably wondering – is it really possible?

The answer is yes – even if you haven’t started planning for it quite yet. But you need to start planning today.

Let’s walk through how early retirement works and how you can put a strategic plan in motion starting today. Once you have a plan in place, you’ll be on the road to early retirement.

What is Early Retirement?

Most people define early retirement as retiring before the age of 65, since Medicare benefits kick in when you turn 65 years old.

The Social Security Administration, however, shaves a few years off that number and defines early retirement as retiring before the age of 62, since social security benefits become available to you when you’re 62 years old. 

Full social security benefits don’t kick in until the age of 70, but the administration still considers retiring at 62 years old as retiring on time.

While anyone can retire early with proper financial planning and lifestyle, it’s prevalent for people who started working in civil service or military service at a young age. 

Many of those career paths see to it that retirees finish out their jobs between the ages of 50 to 55 years old, and still receive full health benefits and pension.

But not to worry, if you’ve chosen a different career path, retiring early is still an attainable goal.

What is FIRE?

The “financially independent, retire early” (or FIRE movement) is a testament of normal, everyday people achieving financial freedom without becoming complete hermits. 

The goal is to bank enough money at an earlier age in order to leave the daily grind of having a “normal job.” In fact, they often lead highly enriched lives on their own terms and standards.

🔥 FIRE – Financially Independent, Retire Early

If you’re feeling skeptical right now, I get it. You may be thinking something along the lines of, “This sounds great and all, but what if I only make $40k a year and am drowning in student loan debt and auto payments?” Don’t worry, most FIRE enthusiasts can relate.

In fact, most of the FIRE crowd earns a good income, not a great income – this is a big part of what makes it so attainable, even for those who didn’t necessarily start saving for retirement and planning how to invest money straight out of school.

The truth is, it doesn’t take a 6-figure salary to retire in your 40s or 50s, or even 60s; the biggest hurdle often isn’t how much you can save but rather, how much you spend.

Spending money is a lot easier than making it, and can often get people into trouble with heavy loads of debt and unwanted financial obligations. You already know this, but letting it sink in again might help save you from your next frivolous purchase.

Pete Adeney, the early retiree behind Mr. Money Mustache, says the focus on spending more, attaining more, and owning more plays a big role in people floundering in an ocean of debt. Instead, he explains, consumers should be living more rationally and finding happiness with what they have.

According to Adeney, his three main goals for his musings on Mr. Money Mustache are: 1. “To make you rich so you can retire early”; 2. “To make you happy so you can properly enjoy your early retirement”; and 3. “To save the whole human race from destroying itself through overconsumption of its habitat.”

He and his wife saved around 70% of their income for years and were able to retire when they turned 30 in Longmont, Colorado. He’s far from alone when it comes to those working towards early retirement, but draws a loyal following since he was able to retire much earlier than most.

So is early retirement synonymous with the FIRE movement?

In a word, yes – but there’s more to it than that.

Early Retirement Data

Retirement Age

According to a study from the LIMRA Secure Retirement Institute:

  • Around half of Americans retire between the ages of 61 to 65
  • Roughly 13% retire between the ages of 55 and 60
  • 1% retire between the ages of 50 and 54
  • 1% retire under the age of 50
Courtesy of LIMRA Secure Retirement Institute

Those stats may be changing in the near future, though, as millennials aren’t taking any chances when it comes to retirement.

America's "Super Savers"

Another study conducted by Principal, a financial management company, focused on getting the inside scoop on “super savers” – a group of people who put $16,000 to $18,000 towards their 401(k) account each year. 

In case you’re wondering, that’s over 90% of the maximum contribution level; a feat that takes dedication and a high level of discipline.

While not all study participants were millennials, the statistics from the group were very telling:

  • Over 20% have postponed on starting a family
  • 43% drive old vehicles and/or own small homes
  • 42% prioritize retirement savings over vacations
  • 17% have no problem saying “no” when friends and family have them to spend money on things like going out for a meal

In a nutshell, most “super savers” are definitely buying into the FIRE movement. They’re focusing heavily on saving now so they can retire comfortably.

Rules for Retirement Early

While the idea of retiring early may have piqued your interest, you’ve got to ask yourself, “Do I have what it takes?”

There are only a few rules to diligently follow, but changing habits can be difficult. Still, if you’re ready to jump in, the challenge will be worth it, especially since increasing your annual savings can dramatically affect how many more years you’ll need to stay in the workforce. Let’s take a look at a few financial rules that people follow to retire early.

1. 70-90 Percent Rule

Many early retirees believe you should be able to replace between 70% and 90% of your income with retirement accounts and social security.

For example, if someone earns $100,000 a year, he or she should have at least $70,000 each year available from those sources. Of course, social security won’t become available until at least the age of 62, so it can’t be counted on in the beginning.

2. 4 Percent Rule

Others are strong believers in the 4 percent rule. This rule states that as long as you don’t go over withdrawing 4% annually from your diversified portfolio (while adjusting for inflation), you’ll have enough money for retirement.

But, as enticing as the rule is, there are a few issues with it. First, it was developed when interest rates were higher, meaning portfolios were earning more than they are now. Second, it was developed for people who expected to enjoy retirement for 30 years or so – meaning it’s uncertain if the rule can still hold up for anyone looking to retire early.

In order to adjust for a longer retirement period while abiding by the rule, retirees would have to subtract 0.5% off the withdrawal rate for every 10 additional years they intend to live in retirement. So, if you plan to be retired for 40 years, you’d want to reduce your withdrawal rate to 3.5% annually, instead of 4%.

3. Be Open to the Idea of Moving

Housing and living expenses can eat up a disproportionate amount of your income, especially when living in a high cost of living area. Retiring early doesn’t have to mean moving away from a place you love, but it’s good to set realistic expectations for what your home and area can do for you.

Being open to moving to a town with lower property taxes, lower living costs, and cheaper housing can help speed up the process or early retirement.

Pros and Cons of Early Retirement

Is early retirement the right idea?

Knowing how much money you need to retire early is only the first step. Even if you have enough money to retire today, is it the right choice? Let’s take a look at the benefits and drawbacks to see if it’s right for you.

Benefits of Early Retirement

Ask anyone why they’d want to retire early and the answer is simple, “I want to quit working and enjoy my life.” While that may be the most obvious benefit, it’s far from being the only one.

1. Improved Mental Health

Though it’s one of the lesser spoken about benefits of early retirement, improved mental health due to lower stress levels is one of the most important pros for retiring early.

Work is stressful, and stress is taxing on the mind. Imagine leaving your stressful office or commute behind; it would probably help you feel so much better and improve your quality of life.

2. Improve Physical Health

Improving your physical health is another big benefit. Sitting all day at a desk is terrible for your health and body, plus sometimes long hours make it impossible to make it to the gym.

Retiring early grants you the time to put the focus back on improving or maintaining your physical health. As we age, the chances of developing heart issues and other problems greatly increases, so dedicating some of your time in retirement to working out can help pump the brakes on any negative ailments that come with age.

3. Time to Explore New Interests

Think of all the things you want to do but have never had the time to get into or focus on. Maybe you’ve always wanted to cruise around the world, or write a book. Maybe you have a DIY project that’s been on the backburner for far too long. Whatever it is, you’ll have time to explore these interests when you’re no longer working a regular job.

4. Easier to Spend Less

Many retirees find they are naturally able to spend less and save more in retirement due to having more time to look for good deals and the patience to wait for items to go on sale. 

Savings can also add up by attending events and attractions, and even shopping for groceries at non-peak hours. The same applies to traveling off-season, which can save considerable money.

Drawbacks of Early Retirement

While going into retirement early has several benefits, it isn’t all sunshine and roses all the time; there are some concerns as well. These drawbacks aren’t deal breakers, but they shouldn’t be ignored either.

1. Retirement Contributions Will Be Limited

After you retire, limits are placed on how much you can continue to contribute towards retirement accounts. Those limits also extend to employers who may have contributed to your retirement plan. So, if you retire at 60, you’ll miss out on five years of potential employer contributions, which could add up to quite a bit of money.

2. Getting Taxed on Retirement Income

If you withdraw your retirement income early, you may face taxes on your account(s). Most IRAs require paying income tax on any monies distributed before the age of 59.5. On top of taxes, you may also incur a 10% early withdrawal penalty fee. These taxes and potential fees are important to factor into your financial plan.

3. Social Security Impact

Leaving the workforce early can also impact the amount of social security you’ll receive. Since you can only begin collecting social security at the age of 62, with maximum benefits on hold until the age of 70, there’s a gap in when you retire and when you can begin collecting social security. 

Additionally, retiring early means you’ll stop contributing parts of your paycheck towards social security, another factor that can impact your benefits.

4. Health Care and Insurance

While once considered a huge drawback of early retirement, healthcare plans and insurance can now just be standard setbacks to consider. Thanks to health reform, you can buy a comprehensive insurance policy through the state online exchanges, regardless of your health status, but it can still come at a high cost.

Review options in your state at healthcare.gov, and keep in mind the premium is just the sticker price. Nearly half of those buying insurance on their own today qualify for some type of subsidy, which can decrease costs. An early retiree with a high premium, for example, has a good chance of qualifying for a break, especially when living on less in retirement.

Good or Bad, Be Prepared for Surprises

In this case, surprises are best avoided when it comes to retirement at any age. These variables can be difficult to plan for, but they’re important enough to try your best.

First, the cost of living adjustment is a good estimation but it’s not a guarantee. When you go into retirement anticipating a specific cost of living increase and adjust your retirement funds accordingly, you’ll also want to plan for estimates to fluctuate, as the economic changes could increase or decrease while in retirement.

Second, no one actually knows how long they’ll live and many retirees live longer than expected. While it’s a great surprise, it can have a strong impact on the funds left in retirement accounts to support your lifestyle. 

While Americans are expected to live an average of 78.6 years, what happens if you live to be 90? If that happens – and it often does – it’s a good idea to plan to live to 90. 

Money left over can be gifted to family or donated to charity. Plus, it’s always better to have too much money than not enough.

Lastly – finally, a good surprise – just because you’re retired, doesn’t mean you can’t make additional streams of income. You may find your new hobby can bring in some extra money, or even devote some time to picking up a lucrative side job for fun.

Planning for Early Retirement

Now that we’ve weighed the pros and con and what to expect with early retirement, it’s time to make a plan. Time to go all in and get serious about your future!

How to Retire Early

Retiring early isn’t rocket science but it does take some hefty planning and dedication. Whether you’re just beginning to consider it or halfway there, here are five steps to help you put the wheels in motion for early retirement.

Step 1 – Choose Your Retirement Lifestyle

No one says you have to travel the world when you retire but maybe that’s exactly what you want to do. Or maybe you want to take a stab at becoming an artist. Whatever it is, think about your desired retirement lifestyle and plan a budget around it.

Step 2 – Create Your Budget

In case there’s any question left, retirement is about budgeting. The key to being ready to retire is having an ironclad budget plan in place. Things can always fluctuate but planning goes a long way in minimizing challenges that may arise. 

So figure out how much you’ll need each month. Include expenses, healthcare, entertainment, etc. The budget needs to make sense for the lifestyle you’ve chosen in Step 1.

Step 3 – Understand Where You Are Now

You know where you want to be, but where are you now? Take a look at your investment portfolio and retirement budget; will it cover your retirement needs? It’s okay if you still have some work to do. Most people don’t decide they want to retire today and give notice tomorrow — it takes time and work.

Step 4 – Change Your Lifestyle

This is where the hard work really begins. If retiring early is the main goal, it’ll likely take a shift in lifestyle to get there faster. A few examples are spending less in order to put more away for retirement and paying off all outstanding debt.

Step 5 – Invest, Invest, Invest

After getting into the habit of spending less, you’ll want to invest that extra money. The idea is to increase your passive income as quickly as possible by pouring as much money as you can into investments to grow your portfolio.

Many people who have achieved financial freedom and retired early have done so by investing large chunks of their income over time.

Stay Accountable

To be successful, it’s important to stay accountable.

Ask someone to hold you accountable so you can reach your goals. This person can be a partner, friend, life coach, or financial planner. It doesn’t matter who you choose, but it does matter how you go about it.

Tell your chosen accountability partner about the financial goals you’re working towards and show them the plan. Explain the expenses you’ve cut out to reach those goals and ask the person to help you stay on track. Then, plan monthly check-ins with that person.

You’ll be more likely to stay on track if you know you have to show what you’ve done for the month to reach your goal.

Retirement Resources

There’s a wealth of information out there about retirement but it’s good to keep a few trusted resources on hand. Here are a few of our favorites to bookmark:

  • This retirement calculator from Vanguard can help you stay aware of how much money you’ll need in your retirement accounts to retire early.
  • Healthcare.gov is an excellent resource for researching your healthcare options and outlining a realistic budget for it. Visit the marketplace to get an idea of how much health care will cost based on your retirement goals.

Retirement Could Be Closer Than You Think

Early retirement is a real possibility but having a plan and sticking to it is a key component. Carefully crafting your strategy and keeping your accountability partner involved in the process can help you navigate the inevitable bumps in the road and stay focused. 

Remember, achieving a lofty and incredible goal like this can take time, so you may as well enjoy the process!

Smart Asset Benefits

  • Get matched with fiduciary financial advisors
  • Advisors are vetted and certified fiduciaries
  • Take the mystery out of retirement planning
  • Their matching tool is free

Author Details

Laura Bostwick

Laura writes about managing money, entrepreneurship, getting out of debt, and using credit cards responsibly.