Saving for retirement at a normal retirement age, like 67, can be difficult. Saving for early retirement—with fewer years to earn and invest plus more years of retirement to fund—can be even more challenging. But life is all about choices.
Once you’ve made the choice to prioritize early retirement, it all comes down to planning—and maybe a willingness to make a few lifestyle changes that could help you reach your goal. Consider this step-by-step guide on how to retire early.
Step 1: Estimate how much you will spend in retirement
Knowing how much you spend each year and how your expenses might change in the future can help lock in a retirement budget. If you’re just getting started on the early retirement path, estimating your potential expenses can work too.
If you know what your annual income is today, you can start the planning process by assuming you'll spend about 80% of the income you will be making before you retire every year in your retirement—that's known as your retirement income replacement ratio. For example, if your estimated preretirement income is $100,000, your spending could be around $80,000 annually in retirement.
If early retirement is your primary focus, it can make sense to consider how you could reduce expenses to save more now. It can also be a good idea to think about how you can spend less in retirement, which could reduce the amount you need to save or let you move up your retirement date.
Read Viewpoints: How much will you spend in retirement?
Step 2: How long do you plan to spend in retirement?
To help make sure you don’t run out of money, Fidelity’s tools default to planning ages in the mid-90s, depending on your current age and life expectancy. For someone planning to retire at age 54, that could mean 40 years of retirement.
Step 3: Estimate (or calculate) the total amount of savings to aim for
The total amount of money you should consider saving will depend on a few factors including the number of years of retirement, your expected rate of return, the expected rate of inflation, and the amount of money you spend each year.
For a quick estimate, to retire before age 62, Fidelity’s guideline suggests aiming to save 33 times (33x) your expenses, assuming an annual withdrawal rate of 3%. For example, Richard is 45 with annual expenses of $75,000. To retire early, he could aim to save 33 times $75,000, or $2.475 million. With a 3% withdrawal rate, he’ll be able to take out $74,250 in the first year of retirement.
Fidelity’s general suggested sustainable withdrawal rate when retiring at 67 is 4% to 5%, with adjustments for inflation. For early retirement, a smaller withdrawal rate could help your money to last as long as you do. Working with a financial professional could help you determine the withdrawal rate that will help you live the life you want and help your money last. To learn more about the sustainable withdrawal rate and Fidelity’s retirement guidelines, read Viewpoints: How can I make my retirement savings last?
Fidelity estimates that saving 10 times your preretirement income by age 67 should help you maintain your current lifestyle through retirement.1 In addition to your expected age at retirement, your expected lifestyle is a second key assumption in our guideline. In other words, do you expect your expenses to go down when you retire? We call that a below average lifestyle. Or will you spend as much as you do now? That's average. If you expect your expenses to be more than they are now, that's above average. Someone planning for above average expenses might want to aim to save 12 times their salary by age 67.
Retiring before or after age 67 affects the savings factor. Aiming to retire at age 62 and maintaining your current lifestyle could mean saving 14 times your preretirement income.
To find out more about Fidelity’s retirement savings guidelines and get your retirement savings factors, read Viewpoints: How much do I need to retire?
Fidelity’s retirement planning tool can help you understand how long your money could last and the income your retirement savings may provide. If you’re not yet a customer, you can build a build a free plan.2
Step 4: Decide how much money you can save each year to retire early
Your savings rate, or the amount of your income you can save each year stated as a percentage, will help determine how quickly you can reach your early retirement goal. Include any savings toward your goal in your savings rate—you could be contributing to a workplace savings plan like a 401(k), an IRA, a health savings account, and brokerage accounts.
Any contributions from your employer to a 401(k) (and HSA if applicable) can be included. In general, for retirement goals and normal retirement age, we suggest saving at least 15% of your income annually for retirement—again, including any employer match. To retire earlier than full retirement age, you may need to save more than 15%.
Timing also plays a major factor, as the longer your money can stay invested, potentially growing and compounding over decades, the lower your savings rate may need to be. Over a relatively shorter period, a higher savings rate may be necessary to reach the same goal.
Read Viewpoints: How much should I save for retirement?
Step 5: Make the most of tax-advantaged accounts
Contributing to accounts that offer a tax deduction like a traditional IRA, a 401(k), or health savings account (HSA) can help reduce your tax bill for the year in which the contribution is made.3 That can help free up some money you may be able to save for the future. Contributing to a Roth account does not confer any tax breaks today, but qualified withdrawals of earnings are tax-free, if you’re 59½ and meet certain requirements.4 Learn more: Which IRA is right for you?
If you don't have access to a workplace savings plan or you've already maxed out your tax-advantaged options, investing in a taxable brokerage account could help you save and invest more for the future. Using tax-efficient investment strategies and products can help keep taxable events in the account to a minimum. Plus, you do have access to the money when you need it. Read Fidelity Wealth Insights: 5 ways to be a tax-smart investor
Step 6: Invest for growth potential
To reach big, long-term goals, you may need the growth potential of stocks or stock funds. Over time, the growth potential of stocks can help your money keep up with the rate of inflation and (hopefully) beyond. The key is to strike a balance between the level of stock market risk you're comfortable with that also could provide the level of returns you need to meet your goals.
If you need help building your investment mix, Fidelity has a collection of digital tools, educational content, and financial professionals that can help. Read Viewpoints: How to start investing
Step 7: Make a plan for taxes and health care in early retirement
Aiming to retire before age 59½ may require some extra planning. If you think it could be a possibility, consider how you’ll pay expenses. Retirement accounts typically penalize withdrawals before that age, Medicare eligibility begins at age 65, and age 62 is the earliest Social Security retirement benefits can be claimed.
As you plan for early retirement, also consider learning about strategic withdrawal strategies that could help reduce the effects of taxes while helping to potentially stretch your savings.
Like diversifying your investments, it can be a good idea to aim for tax diversification as well, for instance owning taxable accounts like savings or brokerage accounts, in addition to tax-deferred accounts, like traditional and Roth IRAs or 401(k)s, and tax-advantaged accounts like HSAs. That can help you take advantage of multiple strategies to help manage taxes throughout your lifetime. Read Fidelity Viewpoints: Tax-savvy withdrawals in retirement
It can make sense to talk to a financial professional about tax-efficient ways of withdrawing from savings throughout a long retirement.
You may be able to withdraw money penalty-free from workplace retirement plans like a 401(k) the year you turn 55 or after if you have separated from the company—if the plan allows Rule of 55 withdrawals. Review your plan documents before making any decisions.
IRA withdrawals before age 59½ are allowed under Internal Revenue Code Section 72(t). Consult with a tax advisor if you are considering this strategy. There are 3 requirements for the distributions:
- Part of a series of substantially equal periodic payments made at least annually.
- Calculated according to one of 3 IRS-approved methods.
- Continued for 5 years or until the account owner reaches age 59½, whichever is longer.
Another important piece of the early retirement puzzle is health insurance.
There are generally a few options.
- If eligible, keep your existing health plan for up to 18 months after you leave your job through the Consolidated Omnibus Budget Reconciliation Act (COBRA).
- Join a spouse/partner’s health insurance through their employer.
- Review health plan choices available in the public marketplace.
- Consider saving in a health savings account (HSA) if you have an HSA-compatible health plan.
Tip: Visit our Finding health insurance before Medicare planner to see what options may be available to you.
Read Viewpoints: 5 ways HSAs can help with your retirement
How to retire early: Last tips and tricks
Start as soon as possible. The earlier you start making steps toward retirement, the more options you may have in the future.
Make the most of catch-up opportunities. Retirement saving accounts like IRAs and 401(k)s allow catch-up contributions for those 50 and older. HSAs also allow catch-up contributions as well.
Beat lifestyle creep. As your income rises, it can be tempting to upgrade your lifestyle. If retiring early is a priority, it it might require you to choose saving a little more and spending a little less.
Fidelity’s free planning tools can help you keep track of your goals and your progress toward them.