What does retiring early really mean?
Retiring early can look different for each person. You can’t start collecting Social Security benefits until you reach age 62, and you typically need to be 65 to qualify for Medicare. In general, retiring before you’re eligible for these benefits would be considered an early retirement.
Chad Gammon, CFP, retirement income certified professional (RICP) and owner of Custom Fit Financial, says retiring in their 50s or 60s is often the goal for his clients seeking early retirement—though some aim to retire even earlier.
Retiring early doesn’t necessarily mean you’re done earning an income forever. Gammon retired early after feeling burned out in his IT career. This allowed him to start his financial planning business. While it could seem as though he just changed careers, Gammon says retiring made it possible for him to pursue his passions.
Taking an early retirement could enable you to do lower-paying work that you find more fulfilling, such as working for a nonprofit whose mission resonates with you or volunteering for a charitable organization.
“[Early retirement] provides that flexibility to find a different purpose if work becomes a chore or you’re not finding fulfillment in what you’re doing,” Gammon says.
How to calculate your savings goal for early retirement
A person who retires on a normal timeline might have 40 to 50 years to ensure they have enough money to support themselves after they leave the workforce. For these individuals, experts often recommend allotting at least 15% of their earnings toward retirement each year.
If you plan to retire early, you have to save much more aggressively. Adherents of the FIRE movement, which stands for “Financial Independence, Retire Early,” sock away as much as 75% of their incomes each year for retirement, forgoing luxuries and carefully budgeting so that they can retire early.
“If your goal when you start working at 25 is to be done by 55, you might have to live very simply during your earning years so that you can put enough away into savings,” says Bethany Dever, CFP, vice president and relationship manager at Rockland Trust.
Many financial firms, like Fidelity or Schwab, offer free tools, including retirement calculators that can help you understand if you’re on track with your savings. However, for these calculators to be useful, you have to know what your expenses will likely look like in retirement.
Gammon says he sees a lot of clients who know how much they have saved, but aren’t as aware of what their expenses are.
“It isn’t necessarily that you know where every single penny goes, but you do need to have a clear sense of what you’re spending,” Gammon says. “I see that as a big gap that early retirees have.”
Depending on your circumstances, you might spend more or less in retirement than you do now. Think about what you want your retirement to look like and what your expenses might be.
Additionally, don’t forget that early retirees often have additional costs. For example, you might need to purchase health insurance through the Affordable Care Act (ACA) marketplace or directly from an insurer until you’re old enough to qualify for Medicare, which is generally more affordable.
Which investment strategies help support an early retirement?
Retirement income typically comes from investment accounts, including tax-advantaged accounts specific to retirement, like 401(k)s, as well as regular taxable accounts.
Retirement accounts
Individual retirement accounts (IRAs) and 401(k)s are two of the most common types of retirement accounts available, and both can be either traditional (pre-tax) or Roth.
Pre-tax 401(k)s are funded with untaxed money taken directly from your paycheck, while funds contributed to a traditional IRA can be deducted from your taxes (because the money isn’t deferred pre-tax from your paycheck, you’ve already paid taxes on it). When you withdraw from a pre-tax account in retirement, you’ll pay income taxes on that money.
Roth accounts are funded with money you’ve already paid taxes on, so when you withdraw from these accounts in retirement, you don’t have to pay income taxes.
Taking money from tax-advantaged retirement accounts before you reach the required age can trigger a penalty.
Taxable accounts
If you’re retiring early, Gammon recommends having a mix of pre-tax, Roth and taxable investment accounts.
Traditional investment accounts or brokerage accounts don’t come with the tax benefits of a 401(k) or an IRA, but they are more flexible when it comes to accessing your money, since you won’t incur penalties on withdrawals.
You will, however, owe capital gains taxes when you sell investments in a taxable account. Assets that you’ve held for less than a year are taxed at the same rate as your ordinary income. Assets that you’ve held for longer are taxed according to long-term capital gains tax rates, which are 0%, 15% or 20% in 2025, depending on your income.
Understanding when you can access your money
There are strict rules for when and how you can access the money you have in your tax-advantaged accounts, and early withdrawals might come with a 10% penalty.
- Traditional 401(k) and IRA: You can start withdrawing from these pre-tax accounts without penalty at age 59 ½.
- Roth IRA: To avoid taxes or penalties, you have to wait until you’re 59 ½ or older and have had the account for at least five years to withdraw earnings from this account. However, your contributions (the money you’ve saved in the account, minus the growth it’s accumulated over time) can be withdrawn at any time. You can also take a one-time withdrawal of up to $10,000 to fund a first-time home purchase.
- Roth 401(k): You can withdraw from this account once you reach age 59 ½ and you’ve had the account for at least five years. You can make early withdrawals if your plan allows it, but unlike with Roth IRAs, you can’t withdraw contributions on a Roth 401(k) penalty-free. A portion of your nonqualified withdrawal will be treated as earnings, requiring you to pay taxes and, potentially, an early withdrawal penalty.
There are some exceptions to these rules, such as if you become disabled or you qualify for a hardship distribution.
What risks and costs should you plan for in an early retirement?
Cash flow
One of the main challenges of retiring early is figuring out how you’ll cover your living expenses.
“If you’re retiring early enough where you’re not going to have Social Security, that’s definitely going to be a challenge,” Dever says.
You can’t start taking Social Security until you reach age 62, and the longer you wait, the larger your monthly benefit will be. Benefits are reduced for those who start receiving Social Security before their full retirement age, which is 67 for those born in 1960 or later. If you delay until age 70, you’ll get the maximum benefit.
Early retirees might benefit from a 72(t) plan, which lets you withdraw from an IRA or 401(k) before age 59 ½ without triggering the 10% penalty. This is done by taking a “series of substantially equal periodic payments,” or SoSEPP. These payments must be taken regularly over the course of at least five years or until you reach 59 ½. Once you start taking them, they typically can’t be altered or stopped.
Another potential source of income comes from the rule of 55, which lets you start taking money from a 401(k) plan if you leave the job that sponsored the plan in or after the year you turn 55.
Because there are so many rules limiting early withdrawals from tax-advantaged accounts, having a well-funded brokerage account is vital.
Additionally, both Gammon and Dever say that early retirees need to be flexible and willing to work again if the need arises.
“Are you willing to go back to work, whether part-time or full-time, if the early retirement isn’t working out the way you had anticipated?” Dever says.
You don’t necessarily need to return to your old career or find another grueling 9-to-5—instead, it might make sense to work part-time to supplement your investment income.
Investing risks
All retirees deal with the risks that come with relying on investment income. The good news is that, because you’re planning for a longer retirement, you have a longer time horizon to weather the ups and downs of the market.
Hits to your portfolio earlier in retirement can cause more damage due to the sequence of returns risk. When you retire in an uncertain market, you risk having to sell your assets at a loss, depleting a larger chunk of your savings and leaving you with less money to grow via compound interest.
Dever recommends working with a financial advisor who can stress test your retirement plan to understand what you stand to lose and how you can adjust your holdings to match your risk tolerance. You might offset investment risk by using techniques such as the bucketing strategy, which divides your holdings into separate accounts or “buckets” that have time horizons that align with various stages in your retirement.
Healthcare
During their working years, many people benefit from employer-subsidized health insurance, where the employer typically covers a portion of their premiums. When you retire early, you won’t benefit from an employer-sponsored plan, so you’ll need to arrange your own coverage until you can receive Medicare at age 65.
This means purchasing health insurance either through the ACA marketplace or directly from a private insurer, which can be significantly more expensive. Dever says the costs of paying for their own health insurance could be the reason some early retirees end up going back to work.
If you’re able to get insurance through your spouse’s employer, that might be more affordable than purchasing an individual plan.
Do you need a financial advisor to retire early?
Even as a DIY-er, Gammon worked with a professional financial planner to see if early retirement was actually possible, and he recommends other early retirees do the same. You don’t necessarily have to work with an advisor on an ongoing basis; checking in with an hourly or advice-only professional can ensure you’re on track.
However, having an ongoing relationship with a financial advisor who manages your investments can be valuable because it helps prevent you from making emotional decisions with your money, Dever says.
As you search for the best financial advisor for your needs, consider working with someone who has prior experience helping people successfully retire early. Many advisors specialize in specific areas or work with particular populations. Because your finances aren’t following the typical path, you might want an advisor who has the right experience to guide you.
FAQ
How much do I need to retire early compared to a normal retirement age?
To figure out how much you’ll need to retire early, start by estimating your expenses in retirement. For those planning a traditional retirement, experts often recommend saving 15% of your annual income. If you want to retire early, you’ll likely need to save at a much higher rate.
Can I retire early if I still have a mortgage or debt?
If you have enough savings to cover your mortgage and other debt payments, you don’t necessarily have to delay your retirement until you’ve paid everything off. However, paying off your mortgage before retirement can reduce your monthly expenses and guarantee you’ll have a place to live even if you experience financial hardship.
What sources of income can support early retirement?
When you retire early, you generally can’t tap into the same sources of income that traditional retirees can, such as Social Security and tax-advantaged investment accounts. Instead, many early retirees use savings in taxable brokerage accounts to fund their retirements until they’re old enough to receive income from other sources.
How should I adjust my lifestyle if I’m retiring early?
If you’re planning to retire early, you might need to significantly curb your spending during your working years so you can save enough to support yourself in retirement.
What happens if market returns are weaker than expected after early retirement?
Early retirees can weather the ups and downs of the market by remaining flexible and adjusting their spending accordingly when the market slows. If you need extra cash, it might be worth getting a part-time job to bolster your income.