Rachel Christian, Annuity.org Writer
  • Written By
    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher focusing on important, complex topics surrounding finance and investments. She is a Certified Educator in Personal Finance with FinCert, a division of the Institute for Financial Literacy, and a member of the Association for Financial Counseling & Planning Education (AFCPE).

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    Kim Borwick
    Kim Borwick, Financial Editor for Annuity.org

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

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    Michael J. Boyle, M.S.
    Michael J. Boyle

    Michael J. Boyle, M.S.

    Former Compliance Professional

    Michael J. Boyle began his career in the securities business in 2011 as a registered financial professional. Over his tenure, he’s worked with asset classes including equities, fixed income, CDs, mutual funds, futures, options and foreign currency.

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  • Updated: December 19, 2022
  • 10 min read time
  • This page features 9 Cited Research Articles
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How to Cite Annuity.org's Article

APA Christian, R. (2022, December 19). Early Retirement. Annuity.org. Retrieved April 1, 2023, from https://www.annuity.org/retirement/planning/early-retirement/

MLA Christian, Rachel. "Early Retirement." Annuity.org, 19 Dec 2022, https://www.annuity.org/retirement/planning/early-retirement/.

Chicago Christian, Rachel. "Early Retirement." Annuity.org. Last modified December 19, 2022. https://www.annuity.org/retirement/planning/early-retirement/.

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Saving for retirement is hard enough. Retiring early requires extra frugality, discipline and planning, experts say. While some people make early retirement a career goal, others may be forced into retirement involuntarily by circumstances outside their control.

Regardless of your situation, early retirement challenges can be offset by curbing your spending, budgeting your money and making smart financial decisions.

Is it Possible to Retire Early?

Many Americans find it difficult to retire before age 65 because of financial responsibilities and reliance on employer-sponsored health care. But early retirement is a major goal for some, and making it a reality requires ample planning and saving.

It is more common for members of the military and employees of civil service jobs, such as firefighters and police officers, to retire early. These workers often retire with full pensions and health benefits even before the age of 65.

Those who work in high-performing industries and earn higher than average wages are better able to save large sums of money early in their careers.

Some people may not plan to retire early but instead are forced into it by other factors. The coronavirus pandemic is a key example of this, as an estimated 2.4 million Americans retired in the first 18 months of the pandemic, according to the Washington Post.

How to Retire Early

The first step of early retirement planning is envisioning your lifestyle. Sitting beachside in Hawaii may be ideal but expensive and possibly unrealistic if you plan to retire at a young age. Unless you maintain passive income streams, profitable investments or earn money on a freelance or consulting basis, your finances will be more restricted if you retire before age 65.

You may also consider semi-retirement. Some people work hard to fully retire from their 9-to-5 job in order to devote time to a passion project, such as starting a business or pursuing a hobby. An income-generating entrepreneurial project can help you preserve your retirement savings. Just because you stop working in a traditional environment doesn’t mean you need to fully retire.

Next, plan a yearly budget for your retirement. Be realistic. Traveling the world will cost more money than living a frugal lifestyle. Start by assessing your current spending. Some expenses may go down. For example, your mortgage will be eliminated if you finish paying off your home. Other costs, such as health care, are likely to increase.

To create a budget, collect at least a year’s worth of bank account and credit card statements, and categorize your spending by type. Common categories include food, housing, transportation, health care and entertainment.

Did You Know?
Financial advisors suggest saving at least 25 times your anticipated annual spending for retirement. For example, if you plan to spend $40,000 a year in retirement, you need to save roughly $1 million.

Determine how much you will probably spend each year in retirement, then add 10% to 15% to account for unplanned expenses.

Use this number to figure out how much you need to save before clocking out from your job one last time. Financial advisors often suggest saving at least 25 times your anticipated annual retirement spending. For example, if you plan to spend $40,000 a year in retirement, you need to save roughly $1 million.

The 4% rule, a standard for retirement planning, may not apply if you’re trying to exit the workforce early. This rule states that if you withdraw 4% of your savings each year, adjusted for inflation over time, your savings should last 30 years. But stretching your savings an extra decade may require dropping your withdrawal rate to 3.5% or 3% a year — at least for a few years.

Next, identify where you can trim costs within your budget. Cutting expenses is an essential step to building your retirement nest egg, especially if you want to do it early. Focus on cutting your biggest costs like housing, transportation and food to increase your savings rate.

Investing & Saving for Early Retirement

The Internal Revenue Service authorizes more than a dozen qualified retirement savings plans. Explore these options, along with stocks and annuities, to create a reliable retirement income stream.

Investing is important because your money needs to grow. Money sitting idle in a savings account won’t provide the additional revenue needed to sustain your lifestyle for 35 years or more.

IRAs and 401(k)s are the most common way people save and invest money for retirement, but experts say you’ll need more than these retirement accounts can provide.

Purchasing a retirement annuity is one way to create a dependable flow of money for your retirement. Annuities are tax-deferred and are issued by insurance companies.

You may want to consider rolling your IRA or 401(k) into an annuity to convert your savings into retirement income. A financial advisor can help you determine the best annuity and strategy for your retirement goals.

Purchasing index funds and creating an investment portfolio is another way to grow wealth for your future.

An index fund is a mutual fund that holds stocks from every firm within a specific market index. For example, an index fund that buys shares of every company listed on the Standard & Poor’s 500 offers investors the opportunity to invest in the entire S&P 500 without having to buy individual stocks.

Index funds generally charge lower fees than other mutual funds and offer broad diversification. They also mitigate some market risk because fluctuations don’t have as large an impact on the market as a whole as they do on individual securities.

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Social Security and Early Retirement

Early retirement begins any time before you turn 65 years old. This is when Medicare, a federal insurance program for older Americans, begins. Social Security, another federal program, defines retirement a little differently.

You can begin receiving Social Security checks as early as 62 years old or as late as 70 years old. Full retirement benefits vary depending on the year you were born. For example, according to the Social Security Administration, the full retirement age for someone born in 1955 is 66 years and 2 months; and someone born in 1960 or later is eligible for full retirement benefits at age 67.

Although you can begin collecting Social Security as soon as you turn 62, your benefits will be reduced if you do. This can permanently cut your benefits by up to 30 percent, though the amount will be periodically adjusted for inflation and cost of living.

For example, if you were born in 1960 or later and are eligible to receive a $1,000 check each month once you reach age 67, your benefits would be lowered to $700 if you claimed Social Security at age 62.

Full Retirement Chart

Conversely, you can retire early and wait to collect Social Security until you’re 66 or older. Just because you stop working at 55 doesn’t mean you must collect Social Security at 62. If you have other sources of income, such as an employer-provided pension, personal retirement savings or a spouse’s income, waiting to collect your money until after you turn 65 or 66 can increase your monthly benefit.

If you can hold out even longer, you stand to gain more. Delaying your benefits until after full retirement age makes you eligible for additional credits that increase your monthly check. The longer you work after turning 66, the more money you typically receive. Your benefits max out when you turn 70 years old.

Keep in mind that Social Security benefits are based on 35 years of your highest earnings. If you have not worked a cumulative 35 years in your life, Social Security will add a zero for each year you were unemployed to calculate your average benefit amount.


FIRE Movement

A recent trend is making early retirement a hot topic. It’s known as the FIRE movement, or Financial Independence, Retire Early. This strategy encourages people to be frugal, cut expenses, work hard and exit the workforce in their 50s, 40s or even younger.

Aggressive saving is FIRE’s backbone. While many financial planners advise saving 10% to 20% of your yearly income for retirement, FIRE followers practice saving at least 50% to 75% of their earnings. This is achieved through simple living and smart investing.

Two main groups of thought exist within the FIRE community — “lean FIRE,” or extreme frugality and “fat FIRE,” or maintaining a more typical standard of living while saving and investing for retirement.

While it’s always a good move to save as much as possible for retirement, the FIRE movement has attracted critics.

These critics take aim at FIRE for being attainable only for the wealthy. Exiting the workforce in your 30s or 40s simply isn’t an option for the average person, and most of those who retire early leave high-paying careers.

In addition, critics argue, it’s foolish to stop working at such a young age because unexpected events can happen down the road. The money you saved may not be enough if you get into an accident or divorce your spouse.

Somewhere in the middle, experts believe that setting goals that align with your values is the best strategy for deciding when to retire.

Obstacles to Early Retirement

Retiring early comes with some challenges. In addition to saving and investing large sums of money in a shorter period of time, you will need to consider and plan for two major obstacles: taxes and health care.

Health Care Costs

One barrier to early retirement is covering health care costs without your employer-sponsored health insurance. Medicare doesn’t kick in until your 65th birthday, so bridging that coverage gap is a crucial part of anyone’s early retirement puzzle.

Without Medicare or insurance from your employer, you will bear the brunt of your medical expenses.

Health Care Options for Early Retirees
  • Employer-sponsored retiree health plans
  • Public exchanges established by the Affordable Care Act (ACA or ‘Obamacare’)
  • Private insurance exchanges
  • A spouse’s health plan

Some employers offer health insurance for early retirees. This scenario is uncommon but ideal because it allows a retired person to remain grouped with the actively employed population for health coverage. This early retirement option is more common for government employees and those who work in other public sector fields.

If your company does not offer early retirement health care, you may be able to purchase coverage from the federal marketplace created through the 2010 Affordable Care Act. This program provides health insurance options that ensure a level of affordability based on your income.

It also guarantees coverage for people with pre-existing medical conditions. Depending on your assets and income, you may qualify for a premium tax credit to help offset the cost of insurance. These subsidies are based on your modified adjusted gross income during the year that the policy is in effect.

Losing coverage because of retirement is a qualifying life event, so you don’t need to wait for an annual enrollment period to apply. You can explore your options at HealthCare.gov.

Obtaining coverage through the private insurance market is another option. This coverage tends to cost significantly more than insurance plans offered in the public marketplace, but you may qualify for lower monthly premiums if you’re young and healthy.

Finally, if your spouse is still working, he or she can add you to their plan.

IRAs, 401(k)s and Early Retirement

Maxing out your tax-advantaged retirement accounts is a cornerstone of smart financial planning. These accounts allow you to enjoy the advantage of tax-deferred savings and sometimes offer an employer match.

According to the Internal Revenue Service, the 401(k) plan annual contribution limit for 2022 is $20,500. The annual limit on traditional and Roth IRAs is $6,000 for people under the age of 50.

But retiring early can reduce your savings, so make sure you’re familiar with the rules. Withdrawing from your IRA or 401(k) account before turning 59 ½ will cost you a 10 percent tax penalty, along with any income taxes that might already be deducted.

Roth IRAs are one exception to this rule because this type of account does not require you to take withdrawals at any specific age. Withdrawals are not taxable as long as they occur at least five years after the account is created and the first deposit is made.

A financial planner may be able to help find ways of avoiding major tax penalties if you need to withdraw retirement account money early.


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Last Modified: December 19, 2022

9 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Bhattarai, A. (2022, May 6). Millions Retired Early During the Pandemic. Many Are Now Returning to Work, New Data Shows. Retrieved from https://www.washingtonpost.com/business/2022/05/05/retirement-jobs-work-inflation-medicare/
  2. Bohan, J. (n.d.). The 5 Essential Retirement Moves to Make in Your 20s and 30s. Retrieved from https://money.com/collection-post/retirement-moves-20s-30s/
  3. Brockman, K. (2019, November 1). Here are 3 signs that you're on track to retire early. Retrieved from https://www.usatoday.com/story/money/2019/11/01/how-to-retire-early-3-signs/40446813/
  4. Frugal Friends Podcast. (2019, September 13). Episode 73: Financial Independence Through Frugality | The Frugal FIRE Movement. Retrieved from https://www.frugalfriendspodcast.com/episode-73-financial-independence-through-frugality-the-frugal-fire-movement/
  5. Internal Revenue Service. (2021, November 5). Retirement Topics – Contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions
  6. Kurutz, S. (2018, September 1). How to Retire in Your 30s With $1 Million in the Bank. Retrieved from https://www.nytimes.com/2018/09/01/style/fire-financial-independence-retire-early.html
  7. McKenna, K. (2019, May 19). Retire Early With Health Insurance: Closing The Coverage Gap. Retrieved from https://www.forbes.com/sites/kristinmcfarland/2019/05/19/retire-early-with-health-insurance-closing-the-coverage-gap/#2d2fb6b11d9c
  8. Munnel, A.H., Rutledge, M.S. & Sanzenbacher, G.T. (2019, February). Retiring Earlier Than Planned: What Matters Most? Retrieved from https://crr.bc.edu/wp-content/uploads/2019/01/IB_19-3.pdf
  9. Social Security Administration. (2019). Benefits By Year of Birth. Retrieved from https://www.ssa.gov/planners/retire/agereduction.html