5 Tips to Work on Now to Retire Early

Quick Answer

Understanding your retirement needs, creating a budget and taking steps to maximize your savings are just a few steps you can take now to retire early.

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While the average retirement age in the U.S. is 62, there are plenty of folks who dream of retiring before then. In 2020, 18% of consumers were planning to retire by age 59, according to a survey from consumer research firm Hearts & Wallets. If this is a goal of yours, the focus then comes down to making it happen.

You can start working toward early retirement in a number of ways. Begin by getting clear on what you want, then make a realistic plan for getting there. Below are some action items that can help you get on the right track.

1. Calculate How Much You Need to Save to Retire Early

How much you'll need in retirement depends on your financial situation. The first step is clarifying your goals for this season of your life. Then ask yourself some questions to determine how you might shape your retirement savings target.

  • Where do you see yourself living in retirement? Will you keep your current home or downsize?
  • What do you expect your debt situation to be like? This includes your mortgage payment.
  • How much do you estimate you'll spend per year in retirement? This could include anything from daily living expenses, medical care or hobbies like traveling.

Your retirement age is equally important. Let's say you'd love to retire at 60. The average life expectancy in the U.S. is 77, which means you'll likely want your nest egg to support you for at least two decades—otherwise, you risk outliving your money. Some financial experts recommend setting aside 75% of your preretirement income. So if your salary upon retirement is $130,000, you'd plan to save enough to have about $97,000 per year you plan to stay retired.

2. Consider the Hidden Costs of Early Retirement

Your retirement nest egg doesn't just consist of your investment account balances and cash savings. For many, Social Security benefits provide a steady stream of income when they're no longer working. But the minimum age required to begin taking Social Security is 62, which means collecting benefits may be off the table if you retire early. Since the size of your benefit will increase every year between then and age 70, it may be wise to delay retirement until you've reached at least your full retirement age. Doing so might also make you less dependent on tax-advantaged accounts like traditional IRAs or 401(k)s. This can help reduce your tax burden in retirement—distributions from these accounts are taxed as ordinary income.

Health insurance is another important factor. The minimum age to qualify for Medicare is generally 65. If you're retiring before then, you'll have to shoulder the cost of regular health insurance premiums, co-pays, deductibles and the like. In 2020, the average monthly health insurance premium for individuals ages 55 to 64 was $784, according to research conducted by eHealth.

3. Create a Budget

Budgeting is important at every stage of life, and can be especially so if you plan to retire early. Once you've estimated your total retirement savings goal, you'll want to break it down into smaller targets. How much do you need to set aside monthly to get to the finish line? Treat this number like any other bill on your budget—then set up automatic transfers to your retirement accounts.

Tracking your spending and cutting out unnecessary expenses can help you spend less and save more. If you have high-interest debt, it's more than possible to pay it down while also saving for retirement. For example, you could contribute enough to your 401(k) to take full advantage of an employer match while you pay off your debt balances at the same time.

4. Max Out Your Retirement Accounts

Maxing out your retirement accounts allows compound interest to supercharge your nest egg. But keep in mind that tax-advantaged accounts like 401(k)s and traditional IRAs have annual contribution limits. For 2022, you can contribute up to $6,000 across all your IRAs ($7,000 if you're 50 or older) and up to $20,500 into your 401(k). Employees who are 50 and over can kick in an additional $6,500. These contributions won't just boost your retirement savings, they'll also reduce your taxable income today. This is not so for Roth IRAs and regular brokerage accounts, however, but the upside is that there's no cap on how much you can contribute to these accounts.

If maxing out your 401(k) doesn't feel doable right now, aim to contribute enough max out your employer match. (It's essentially free money.) You can then increase your retirement contributions gradually over time. One option is dialing it up by 1% or 2% every year. You can also direct cash windfalls like work bonuses, tax refunds and inheritances toward your nest egg.

5. Rebalance Your Portfolio Along the Way

Investment accounts are the primary way to save for retirement. But there's built-in risk, which is why your asset allocation is so important. The idea is to weigh the potential risks and rewards of different investments, then build a portfolio that supports your long-term financial goals, risk tolerance and retirement timeline. Younger folks are generally better positioned to take on more risk since they have time to recover from bouts of market volatility. As you get closer to retirement, playing it safer is often recommended—otherwise your income could take a hit when you're no longer working.

To maintain your desired asset allocation, you'll likely need to rebalance your portfolio on an annual basis. That's because the value of your investments may change over time. As a result, your portfolio could wind up over or underweighted in certain areas. Rebalancing sets things right.

The Bottom Line

Understanding your retirement goals is essential if you're hoping to retire early. From there, it comes down to ballparking your expenses in retirement and taking steps to maximize your savings. You'll want to keep your overall financial health going strong along the way. That's where free credit monitoring with Experian comes in. It's a simple way to protect your credit in the run-up to retirement and beyond.