How to retire early

In a nutshell

Early retirement is a game of math and tradeoffs.

• You may be able to retire earlier than most if you're willing to live modestly in retirement.
• You can dramatically increase your chances of a comfortable retirement if you're a diligent saver who invests early and often during your career.
• It's also likely you'll have to give a few things up now so you can enjoy early retirement later on.

How much will you have to sacrifice, exactly? That depends on an array of factors, from your income to how many years you have until you retire and the type of lifestyle you want to enjoy once you walk away from work.

So, is it really possible to retire at 50 or 55? How about the age of 45? If you want to retire before the median retirement age of 62, take these important steps.

• Determine your ideal retirement lifestyle.
• Understand the 4% rule.
• Take stock of where you're at right now.
• Use a retirement calculator to see how much you need.
• Factor in Social Security and other income sources.
• Find ways to save and invest more now.
• Build a bridge account.
• Modify your plan as necessary.

Determine your ideal retirement lifestyle

The first step to retiring early involves knowing how much you want to spend each year during retirement. This step can be tricky since nobody knows exactly how their retirement budget will look and also since your expenses may be entirely different in the future than they are right now.

For example, having kids at home right now can lead to considerable spending that will be (mostly) over once they go to college and start their adult lives. You may also have expenses now that you will not have a few decades from now — bills like a monthly mortgage or a monthly vehicle payment.

Either way, you need to take time to figure out approximately how much you might spend in retirement, and you should also strive to keep inflation in mind. If you currently earn a combined household income of $120,000, or $10,000 per month, you need to know whether you'll need that amount or less to get by when you retire.

While there are no hard and fast rules here, the general rule of thumb asks you to provide approximately 80% of your current income for retirement. That means someone with a $120,000 annual income would need to secure $96,000 in annual income for retirement. Meanwhile, someone who earns $90,000 per year would need to ensure they can spend $72,000 each year they're retired.

Understand the 4% rule

As you plot out your early retirement, you'll also want to understand the 4% rule. This basic rule of thumb says you can plan on withdrawing 4% of your retirement funds during early retirement (and mid-retirement) without depleting all your assets.

This rule is another one that will help you determine how much you need to have invested for retirement, and you can use it to tweak your goals. Consider the example of wanting to have $2.4 million before you retire early. Using the 4% rule, this nest egg would let you withdraw $96,000 per year to live on during early retirement.

Is that how much you're planning to spend in early retirement? Or do you think you'll need more or less? These are important questions to ask yourself as you formulate your early retirement plan.

Take stock of where you're at right now

Next up, you'll want to look closely at your current assets for retirement. How much do you have invested in a 401(k), a Roth IRA, or other retirement accounts you have been contributing to so far?

This figure will have a significant impact on your ability to retire and for more reasons than one. After all, how much you have now directly correlates with how much more you need to save and invest so you can retire when you want.

As an example, let's say you currently have $500,000 across a 401(k) plan and a Roth IRA, and you also have $100,000 in a brokerage account. This means that, so far in your journey to early retirement, you have $600,000 in retirement funds you can build on. If you plan on drawing down your retirement savings by 4% per year at age 55 to replace $96,000 in earnings, you'll need $2.4 million in assets.

Needing $2.4 million before you retire early means you'll have to hatch a plan to build $1.8 million in additional wealth and income sources as you work toward early retirement. That may sound like a lot (and it is!), but it's not unattainable if you're able and willing to do the work.

Factor in Social Security and other income sources

In addition to the money you plan to save and invest for early retirement, you can also factor in Social Security payments. This part is tricky because you may not know yet exactly when you'll begin taking Social Security distributions, and since nobody knows for sure whether changes will be made to the program before any of us retire. That said, the Social Security Administration offers a Social Security Quick Calculator you can use to get a general idea.

If you have other income sources, you can also keep those in mind as you plot out your early retirement. Examples can include a pension you have access to, income from rental properties you own, and more.

Use a retirement calculator to see how much you need

Once you have all your ducks in a row, you can use a retirement calculator to see what you'll need to accomplish before you can retire early. Of course, this part can be difficult, too, since you don't know what kind of investment returns you'll receive along the way. With that in mind, many experts suggest being conservative with potential earnings and using a figure like 6% to estimate future growth.

The compound interest calculator from investor.gov is free to use and very useful when it comes to determining how much you will need for retirement. All you have to do is plug in some numbers:

• Your current amount in assets for retirement.
• How much you plan to invest each month.
• Your retirement timeline.
• Your estimated annual returns.

Let's use the same example above and say you currently have $600,000 in assets for retirement but hope to have $2.4 million before you quit your job. Let's also say you are currently 40 years old and hope to retire at the age of 55.

If you play around with the calculator, you'll find that investing $2,000 per month for the next 15 years will only get you to $1.996 million with an annual return of 6%. However, investing $3,000 per month will get you to $2.275 million, and investing $4,000 per month will get you to $2.55 million.

These figures are just estimates, and you'll want to keep Social Security payments and other income sources you have in mind as well. Either way, having a general idea of how much you need to invest each month to retire can be very eye-opening.

Find ways to save and invest more now

Using a compound interest calculator or retirement calculator may reveal that you're not close enough to your goal or that you'll have to change your lifestyle now to get where you want to be later. In either case, you should strive to find ways to save more and invest more now.

Steps you should consider taking immediately include the following.

Take stock of your current spending habits

Break out your current bank statements and credit card bills to see where your money is currently going. Also, consider using a free budgeting app like Empower to get a bird's eye view of your spending.

Look for areas of your budget to cut

Find areas of your spending you can cut down on, whether that includes dining out, getting a new car every few years, or excessive spending on hobbies. Once you find ways to spend less, you can divert more cash toward investing for early retirement.

Boost your workplace retirement contributions

Saving more each month in your 401(k) or other tax-advantaged retirement plan can help you get to early retirement faster while reducing your taxable income.

Seek out alternate ways to invest for retirement

Also, consider opening additional retirement accounts you may be eligible for, such as a traditional IRA or a Roth IRA. A brokerage account is also worth opening if you have extra cash to invest for your goal.

Pay off high-interest debt

Finally, hatch a plan to pay off any high-interest debt you have. You can even consider consolidating debt with a personal loan from Marcus by Goldman Sachs.

Build a bridge account

While saving for retirement in a 401(k) or an IRA is one of the best ways to reach your goal, these tax-advantaged accounts make you wait to access your money without paying a penalty until you're at least age 59 ½.

But you're planning for early retirement, so you need some assets you can access well before the age of 59 ½. With that in mind, you'll want to build a bridge account or other income sources you can use to fund early retirement until you're old enough to tap into your IRA or 401(k) retirement accounts.

There are several ways to do this, including:

• Investing in a brokerage account that lets you build wealth you can access at any time. (You will have to pay capital gains each year you sell investments, and you may have to pay income tax on dividends or fund distributions.)
• Saving up a few years of expenses in a savings account with a bank like Capital One, which you can use for living expenses as needed.
• Investing in a Roth IRA that lets you access your contributions (but not earnings) penalty-free before the age of 59 ½.
• Building up other income sources from rental properties you own or part-time work.

You can (and probably should) take part in a combination of these moves in order to fund the early years of your retirement. After all, the more you can do to increase your assets for retirement now, the faster you can get to your goal.

For example, you can invest monthly in a brokerage account, stash away some money in a high-yield savings account, and still try to build up other income streams you can use to retire.

Modify your plan as necessary

Finally, know that any plan you make for early retirement will need to be revisited each year. For example, you may have to modify your plan if you wind up achieving higher (or lower) investment returns than you planned for.

Other reasons you may need to adjust your plan include:

• Receiving a windfall you can use to fund your retirement.
• Lowering your living expenses dramatically.
• Discovering a profitable hobby.
• Adjustments to account for inflation.
• Deciding you'll take Social Security benefits early.
• Discovering you want a more expensive lifestyle in retirement than you thought.

If you have several years (or even several decades) until your desired retirement age, any of these scenarios and plenty of others could come into play. With that in mind, the retirement plan you craft now is one that will probably need to change along the way.

Plan for early retirement now but make sure you're flexible enough to roll with the punches all along the journey. By planning diligently for the lifestyle you want and being willing to tweak the details when you need to, you'll increase your chances of achieving the early retirement you've always dreamed of.

Frequently Asked Questions (FAQ)

Is retiring at 55 too early?

There are no hard and fast rules that apply to retirement or when anyone can or should retire. The best age for early retirement is different for everyone, but the bottom line is you have to plan to live many years without income from a full-time job.

How much money do I need to retire at 55?

To retire at the age of 55, you'll need to have enough investments to fund your chosen retirement lifestyle. Using the 4% rule, someone who wants to retire at 55 with $100,000 in income to spend each year would need to have $2.5 million in retirement assets stashed away.

Is retiring early worth it?

Only you can decide if retiring early is worth the extra work and the sacrifices you'll need to make. However, saving and investing early will give you the option to retire early if you want to.