Six steps to retire early

What is early retirement?

Early retirement can mean different things to different people, depending on the specific age they are hoping to retire. 

For most people, perhaps, being “ready to retire” is more about their financial situation than their age. So, you may be ready to retire when you’re 40, assuming you can afford to. 

Not everyone can finish working at 40, of course. 

But the earlier you begin planning, the better chance you have of reaching your goal of early retirement. However, you still wouldn’t be able to draw Social Security benefits until 62, at least, but you’d be effectively retired. 

US citizens can start claiming their retirement benefits from Social Security at age 62. However, your monthly Social Security benefit will be reduced if you decide to start drawing those benefits before reaching full retirement age, which is either 66 or 67, depending on the year you were born (you can find this out on the Social Security website here). 

The earlier you retire, the lower your retirement benefits will be, with reductions rising as high as 30%. In other words, if you retire or start drawing Social Security benefits at age 62, you could receive only 70% of your monthly benefit if you waited until age 67. Some people might want to retire in their early sixties, while others may be looking to end their working careers in their fifties or even forties.

Early retirement: a step-by-step guide

Picture your retirement: Will you spend a lot of money traveling, or will you live frugally and enjoy your free time with minimal expenses? Will you need money to start a business or live an active social life? 

These questions are key to planning your retirement, as they will give you a better idea of how much money you will need to live out your planned retirement.  

Alongside general expenses such as food, your mortgage or rent, and healthcare, you will also need to consider other outgoings. These could and likely will include transport and recreation. 

If you’re retiring while you're still financially responsible for your children, you will also need to factor in those costs.  

Your budget will probably change when you’re retired, given that you’re giving up income. But if you can estimate your post-retirement income, if any, and what your expenses will be, you should be able to get an idea of what your financial parameters will be.

1. Picture your retirement

Will you be spending a lot of money to travel when you retire? Or live frugally, enjoying your free time with minimal expenses? Will you need money to start your own business or live an active social life? 

These questions are key to planning your retirement, as they will give you a better idea of how much money you will need to live out your planned retirement.  

In addition to general expenses like food, housing, and healthcare, you will also need to consider transport, recreation, and family matters.

Your budget will probably change when you retire, too. But if you can get an estimate as to what your financial needs will be, you’ll get a ballpark idea of the sort of retirement income you’ll require.  

2. Size up your current financial situation

Looking at your financial situation objectively, ask yourself: Where do I stand, and how feasible are my retirement goals? 

Is retiring at 50 realistic if you’re 40 and only have $20,000 stashed away? Probably not. 

But if you have $500,000 saved for retirement and need a balance of $900,000 to retire by age 50, you can probably afford to be more optimistic.

3. Do the math on your retirement income

As noted, Social Security won’t start paying out your retirement benefits until you’re 62, at least. 

The earlier you retire, the lower those benefits will be. But before and after you start receiving these benefits, you’ll need to consider the other ways you’ll generate income. 

For instance, will you be receiving money from other fixed sources, like pensions or annuities? Take everything into account. For example, if you figure you’ll need $50,000 per year in income post-retirement but will receive $3,000 per month from a pension, you’ll want to consider that $36,000 per year when crunching the numbers. 

4. Try to pay off your debts and mortgage 

With an eye on saving for your future, you’ll first want to start paying off your debt as much as possible. 

It would be counterproductive to start saving while you’re still making monthly debt payments, so it’s wise to focus on any interest you owe on debts that could outweigh the interest you generate from your savings.

Similarly, making overpayments on your mortgage should allow you to pay it off sooner. Just be sure to check with your mortgage broker that you won’t incur any penalty charges for early repayments. If you’re able to pay off or down your debts by a significant amount, you should free up room in your budget that can help you make ends meet during retirement.

5. Set a savings goal

There are several “rules” or guidelines that help many people retire early - though none are guaranteed to help you achieve your goals.

For example, the “Rule of 25” is a recommendation that you should have 25 times your annual expenses saved up. You’ll have a rough idea of this number since you’ve already done the math on the type of retirement you want - that is, your post-retirement expenses. 

Additionally, you may want to consider investing that money so that it (hopefully) generates returns that outpace inflation.

Another strategy for saving is the “4% rule.”

The “4% rule " applies to investments. Developed in the 1990s, this rule advises drawing out around 4% of your invested savings in your first year of retirement, after which you can draw 4% each year once inflation has been adjusted. Ideally, this should help you control your spending and keep it aligned with the growth of your investments.   

Depending on how much you need to save, you may need to rein in your spending in the lead-up to retirement. If you can cut costs on non-essentials now, you’ll likely be in a better position to stay on track and meet your savings target. Our free savings calculator can help you work out how to reach your goal.

6. Invest sensibly, with growth in mind

Your savings should be treated with care, and with risk in mind. But keep in mind that if you’re looking to retire early, you may have less time to grow your wealth, so you’ll want to carefully weigh potential risks with potential rewards or higher returns from your investments. 

With that in mind, a balanced portfolio that is crafted with long-term growth as the goal is typically the best way to sustain your retirement savings by balancing risk and reward. 

Financial advisors, like those you can find with Unbiased, will help you to curate a portfolio that best suits your risk appetite and your retirement timelines so that you are optimizing your retirement fund.  

Of course, as you approach your planned retirement date, you’ll want to switch some of those investments into less risky areas. But keep in mind that you could be retired for a long time, so maintaining a healthy portfolio is essential.  

Get expert financial advice 

Planning for retirement is a long, important process. 

With the help of a financial advisor, you can put yourself in the best possible position to retire on your terms. 

Unbiased can help you match with an advisor best suited to meet your needs. Get started now.