How to retire early—what you need to do now

Not even close to age 65—but thinking you’d love to retire early? How do you turn that dream into reality? It’s no surprise that the biggest barrier to retirement is affordability,¹ and the earlier you retire, the more years you’ll need to prepare for financially. But there are things you can do to get yourself in position to retire early and live your dream.

Start by defining what you want your lifestyle in retirement to be. You’ll need to then weigh the pros and cons of having fewer years to save—but more years to spend. You may need to evaluate whether you can afford the retirement you want and retire early or if you’ll need to make some tradeoffs. Here are some tips to help you figure it all out. 

Fine-tune your early retirement vision 

Why do you want to retire early? Perhaps your dream is turning a hobby into your everyday focus. Or maybe it’s moving to paradise, wandering the world, living more simply, or just being able to do the things you truly love but haven’t had enough time to fully explore. Retiring early could also include investing in a rental property or taking on a part-time job to help cover your cost of living. No matter what your ideal retirement is, the more you define the lifestyle you want, the better position you’ll be in to set yourself and your family up for success.

TIP: Deciding where you want to live in retirement can make a big difference. The type and cost of housing can vary widely by geography—and whether you own or rent is a big decision. Check online sources² to get an idea of lower-cost locations.

 Do your homework

Take the time to do some simple math.

  1. Calculate the amount you think you’ll need each month for essentials, nonessentials, and healthcare—getting as detailed as you can. Include all of your living expenses, transportation and travel expenses, and anything else you’ll need to pay for—for example, moving costs, if you’ll be relocating. 
  2. Add up your retirement account money and other estimated income to figure out how much you’ll have.
  3. Figure out how many years you’ll live in retirement—in other words, how long your money has to last. If you consider that the average 65-year old lives 20 or more years,³ and you retire at 55, for example, that’s 30+ years for which you’d need to plan and save. 
  4. When you subtract amount (1) from amount (2), do you get a positive number, indicating that your money can last through your retirement years? Create a budget to help evaluate your assumptions. It can also help guide you once you do retire.

TIP: If you’re retiring early, you won’t be able to tap into your Social Security benefits until at least age 62. And taking your benefit early, before “normal retirement age,” will reduce your monthly amount since you’ll be receiving your benefit for a longer period of time.

Build as much retirement savings as you can

Save, save, and save more. You’ll need to save as much as possible, and you’ll want to consider taking advantage of tax-deferred savings plans—such as 401(k)s and IRAs—as well as other accounts and investments. If you have a plan through work, be sure to take advantage of matching contributions from your employer—after all, it’s extra money. And max out your contributions in your 401(k)s and IRAs, if you can. The 2020 IRS limits let you contribute up to $19,500 ($26,000 for age 50+) to your 401(k) and up to $6,000 ($7,000 for age 50+) to your IRA. 

TIP: If you take money out of your retirement account before you reach age 59½, it will be taxed, and you may pay a penalty. So, if you want to retire before age 59½, you’ll need some other sources of savings that will last you until then.

Don’t let debt keep you from retiring early

We’ve all been told that some debt can be necessary—such as a mortgage or student loans for your kids’ college. But debt can also get in the way of your plans, if you’re trying to retire early. Each long-term loan—and its interest payments—that you take on is money that you could’ve saved for your early retirement. If you have credit card debt, explore how you can lower your fees and interest rates, so you can keep more of your own money. 

TIP: Too much debt can signal financial stress—in fact, 59% of workers say their debt is a problem, with one in five calling it a major problem.¹ Many credit card and other companies will work with you to reduce your payments or your rates.

A health savings account can help your retirement savings last longer

Healthcare costs are among the biggest expenses in retirement, potentially adding up to $285,000—or more.⁴ Using a health savings account (HSA), which is offered in tandem with high-deductible healthcare plans, can help you reserve your retirement savings for nonhealthcare expenses. HSAs can give you a three-tier tax advantage: 

  1. Your money is exempt from taxes when you save it. 
  2. The interest you earn on your HSA grows tax free.
  3. You pay no taxes when you withdraw from it, as long as the money is used for qualified medical expenses. 

TIP: Your entire HSA balance carries over year to year, and you can take it with you if you change employers. You can use HSAs to pay for healthcare costs today or in the future—even in retirement, no matter when that may be.

Bringing in the experts can help you build a plan to retire early

Planning to retire early can be a complex decision, but you’re not alone. Talk to your friends and family, and have them ask questions to be sure you haven’t forgotten anything. Then visit with your financial professional to validate your assumptions and calculations—and factor in how things such as market activity and inflation could affect your plan. Remember that unexpected things can happen, from unforeseen health events to job market downturns. To help protect yourself, consider backup strategies, such as what you could do if you needed to find temporary work. 

It’s a lot to consider. But then, having a plan that lets you retire early—on your terms—is well worth the effort.

1 John Hancock’s financial stress survey, John Hancock and Greenwald & Associates, June 2019. A survey of more than 3,500 workers to learn more about individual stress levels, their causes and effects, and strategies for relief. 231 Cheapest U.S. Cities for Early Retirement,” Kiplinger, March 2020. 3Fact Sheet,” U.S. Social Security Administration, 2020. 4Estimates for Health Care Costs in Retirement Continue to Rise,” PLANSPONSOR, April 2019.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.