What Is Early Retirement? How to Retire Early

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  • Most people wait until they are between the ages of 65 and 67 to retire. However, early retirement may be an option for those looking to exit the workforce sooner.
  • Employees who retire early will not be able to access Social Security benefits until age 62, and tax penalties may also apply to withdrawals made from many retirement accounts before a certain age.
  • If you're hoping to retire early, it's important to calculate your projected expenses, pay down as much debt as possible and save aggressively.

Early retirement may sound like a fantasy, but it doesn't have to be. With thriftiness and thoughtful planning, you may be able to exit the workforce early without sacrificing your financial security.

What is early retirement and when can I retire?

Retirement is the act of permanently leaving the workforce. In lieu of a regular paycheck from an employer, you'll instead rely on a combination of federal and state benefits, employee pensions, savings, investments and withdrawals from retirement accounts such as 401(k)s and IRAs.

Most people spend a significant portion of their life saving for retirement. Although you can retire at any age, many Americans wait until they reach what's known as full retirement age (FRA), which is the point at which you can receive 100% of your Social Security benefits. Although the exact age depends on when you were born, it ranges from 66 to 67.

However, it's not uncommon to retire before age 66. In fact, on average, Americans retire around age 62. This is the earliest age at which you can begin receiving monthly Social Security benefits, although they will be reduced by a small amount before you reach your FRA.

Some employees may retire even earlier than age 62, provided they have the financial means to support themselves. But it's important to note that retirees cannot access Social Security benefits at any percentage prior to age 62. Tax penalties may also apply to withdrawals made from many retirement accounts before you reach a certain age.

Things to know about early retirement

Early retirement is a numbers game — here's a breakdown of the facts and figures you'll need to know.

How much should I save to retire early?

As a rule of thumb, you can expect to spend around 80% of your pre-retirement income during each year of retirement. However, if you anticipate a major lifestyle change during retirement — for instance, if you plan to go back to school or travel the world — you'll also need to account for these extra expenses.

When will I qualify for Medicare benefits?

Medicare benefits generally kick in at age 65. However, people with a disability, end-stage renal disease or ALS may be able to claim Medicare benefits early. If you do not meet these special circumstances and retire early, you'll need to purchase health insurance, either through a private insurer or your state's public exchange.

When will I qualify for Social Security benefits?

You'll only qualify for your full Social Security benefits once you reach your FRA. Although you can access a portion of your monthly Social Security benefits beginning at age 62, if you wait until you reach your FRA, you'll generally receive more money each month. These extra dollars can make a real difference for retirees with limited income.

Will my tax bracket change if I retire early?

Whether you're working or retired, your tax rate is based on how much money you make each year. That means your tax bracket won't change simply because you retire.

However, depending on your income, a portion of your Social Security benefits may be taxed. Early retirement can also lead to significant tax penalties related to your retirement accounts. In many cases, tapping into your retirement accounts before age 59 ½ can trigger a 10% tax penalty.

Steps you can take to retire early

Retiring before your FRA takes forethought, discipline and plenty of savings. Here are a few steps to consider if you're hoping to achieve early retirement.

  • Estimate your living expenses. Refer to your monthly budget to find out how much you spend each month on necessary expenses. This will help you estimate your baseline costs once you retire. Be generous, as many retirees underestimate how much they'll spend once they exit the workforce. It's also important to anticipate the surprise costs that may pop up during retirement, such as unexpected medical needs.

    An online retirement calculator can help you plan for early retirement. These tools allow you to input important details such as your age, income, savings habits, living expenses, desired retirement age and expected benefits. Once you have an estimate of what you need to save, review and update it regularly to account for lifestyle changes over time.
  • Save aggressively. You'll generally need to save more than the average employee to achieve early retirement. One popular solution, known as the FIRE (Financial Independence Retire Early) method, suggests saving at least 30 times your annual expenses before you retire. Once you retire, it's commonly recommended to withdraw about 4% from your retirement savings each year.

    Whatever strategy you choose, you'll need a bold savings and investment plan. Compounding interest is key, so be sure to save early. It's also wise to max out your annual contributions to your employer-sponsored retirement plan if you can.
  • Get out from under your debt. Aim to pay off your debt before you retire. This should include your mortgage, student loans and other types of installment credit, as well as revolving credit accounts, such as credit cards.

No matter when you plan to retire, it's important to start building your wealth now. The sooner you start saving, the more likely you are to secure a steady stream of retirement income that can support you for many years to come.

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