Early retirement: Navigating challenges and achieving success

What is early retirement?

For many, early retirement means leaving the workforce before your full retirement age—the age when you become eligible to receive full Social Security retirement benefits (typically ages 65–67). For others, it can mean before age 65—when Medicare health coverage becomes available—or before age 62 since that’s the first time people can claim reduced Social Security retirement benefits.

Why retiring early can be a challenge

If you want to retire early, you’ll need to put a strategy in place that addresses some of the most common obstacles early retirees face. Here are just a few to consider:

1. Less saving, more spending

Financially speaking, your adult life is divided into two phases: accumulation and decumulation.

• Accumulation is when you’re working, saving money, and investing it for retirement. This phase of your life typically lasts from the time you enter the workforce to the time you leave it. 
• Decumulation begins when you stop earning money and have to live off your accumulated saving to fund your retirement.

Retiring early shrinks your accumulation phase while growing your decumulation phase. Put another way: If you move your retirement date forward by one year, you’ll have one less year to save and one more year that you need to live off your savings. You’ll need careful planning to navigate this double impact on your nest egg.

2. Some sources of retirement income are restricted

Even if you have a lot of money set aside for retirement, there are rules in place that make it difficult to access ahead of schedule. For example: 401(k)s and IRAs impose a substantial penalty if you tap into them before age 59½. And when it comes to Social Security, the earliest you can access it is age 62 (and even then, you will receive a reduced benefit). 

3. Navigating health insurance

Social Security isn’t the only government benefit reserved for seniors. If you’re planning to use Medicare for healthcare costs, it’s important to remember that eligibility begins at age 65. And since you’re no longer working, you’ll no longer have employer-sponsored coverage. That means you’ll have to purchase private health insurance or find another way to pay for healthcare until you turn 65. 

Longevity risk—the possibility of outliving your savings

The earlier you retire, the longer your savings may need to last—potentially 30 years or more. That longer retirement increases longevity risk, or the possibility that you’ll outlive your savings. Inflation, rising healthcare costs, and market fluctuations can add to the challenge by putting additional pressure on your nest egg over time. Planning for a longer lifespan can help ensure you have reliable income throughout retirement.

How to retire early: 4 ways you can make it work

While retiring early is often a challenge, the good news is—it can be done. Here are a few ways you can make it happen.

1. Consider taking advantage of these retirement rules

While there’s no way around the Social Security minimum age, there are ways you can access money in tax-advantaged retirement accounts before turning 59½. 

One strategy is to open a Roth IRA or Roth 401(k), both of which allow you to withdraw the principal (but not the earnings) from your account before age 59½ without having to pay an IRS penalty.³ (Do you make too much money to qualify for a Roth? You can work with a financial professional to execute a backdoor Roth IRA maneuver, though if you’re converting funds you previously deducted, you’ll need to pay taxes on the conversion.) Early withdrawals from these accounts may be able to tide you over until other sources of retirement income become available. It doesn’t hurt that income from Roth accounts isn’t taxed, so you can keep more of it for your living expenses.

A second strategy applies specifically to the 401(k) of your current (and soon-to-be-former) employer: If you are retiring early, you can access the money in your account as early as age 55. This is called, appropriately, the Rule of 55. 

2. Save enough to live on the interest and dividends

Money can’t solve all problems. But planning an early retirement is one situation where having a big nest egg works to your advantage.

Unless you cash out all of your accounts on the day you retire, you’ll probably still see some growth in retirement— whether it’s from interest earned on deposit accounts or from (potentially) higher stock market returns. And investments like bonds and dividend stocks might also yield some income. If the income and market returns can cover your living expenses, then in theory you would be able to leave the principal intact—you wouldn’t have to “decumulate” at all.  

That’s the theory, anyway. In practice, inflation in retirement means your living expenses will rise with each passing year. This, plus the potential for rising healthcare costs, means that you might wind up dipping into your savings after all. Still, if you can build a very substantial nest egg, and put it in investments that give both returns and income, you may be able to slow your rate of decumulation enough to stretch your savings for a very long retirement. 

3. Choose what “retirement” means to you

You get to decide what retirement means to you—and it doesn’t have to mean “never working again.” If you can keep busy with part-time work you’re passionate about, then you may be able to earn enough income to take the pressure off your savings. 

What that work looks like is up to you, but many entrepreneurial retirees start a small business or side hustle to earn a little income. If you’re a creative person, it might mean opening up an online shop or taking on contract work from companies that need creative work like photography or web design. If you’ve had a successful white-collar career, you could parlay that into part-time consulting work. And opportunities abound for part-time or gig economy work.

Many retirees find a little bit of work to be invigorating. And if you make enough money from it, you’ll be able to stretch your retirement savings even further. 

4. Get guaranteed lifetime income

There are few guarantees in life. Maybe the income you hoped to get out of your investments isn’t enough to pay the bills; maybe your services as a consultant aren’t as in-demand as you hoped. That’s why it might be a good idea to introduce some certainty into your retirement income by purchasing an annuity. 

In general, annuities are issued by an insurance company and allow you to convert a lump sum into a steady stream of annual income. And in some cases, that income is guaranteed⁴ to last your entire life—which could be crucial if you retire in your 50s and wind up living well into your 90s. (Just keep in mind that the earlier in life you start taking income from an annuity, the lower your payments will be.)

Annuities come in many varieties, including variable annuities that can provide exposure to market returns. You can also purchase riders to your annuity to get additional benefits. Because these products can be complex, it’s a good idea to work with a trained and experienced agent who knows how to choose the best annuity and integrate it into your retirement income plan. Make sure, too, that the company issuing the annuity is financially secure.

Bridge your healthcare coverage before Medicare

Unless your company provides retiree medical benefits, you’ll need to secure healthcare coverage that can keep you protected until you turn age 65 and become eligible for Medicare benefits. Depending on your situation, you may be able to continue your employer-sponsored coverage through COBRA, enroll in a plan through the Affordable Care Act (ACA) Marketplace, or join a working spouse’s plan. If you have a health savings account (HSA), you can also use these tax-free for qualified medical expenses.

Retiring on your terms and timeline

If you want to retire early, it’s important to make sure that you can do it on your terms. You’ll need to be diligent with your savings while you’re working, and use tax-favored accounts and annuities so that you have steady income streams to take advantage of in retirement. It’s also important to work with a financial professional who understands how to take full advantage of the various accounts, tax strategies, and products available to you.

Do all that, and you may be able to build a retirement plan that lets you exit the 9 to 5 earlier than you thought.

Frequently asked questions about early retirement

¹You can claim reduced Social Security benefits at age 62 and full benefits at age 65 or 67 (depending on when you were born).
²You can start making withdrawals from qualified retirement accounts at age 59½.
³Your Roth IRA must be open for at least five years to access your funds in this way.
⁴Guarantees are based on the claims-paying ability of the issuer.