Traditionally, many Americans have viewed 65 as a target retirement age. However, there’s usually no legal requirement that you retire when you turn 65. Most Americans are free to retire either after or before this age if they have the financial resources to do so. So if you dream of retiring at age 60, 50 or even 40, you need to plan carefully in the years leading up to your anticipated retirement dates.
Sock Away Savings
Depending on your income and target date, you many need to slash current expenses, foregoing luxuries (and even non-luxurious discretionary spending,) and perhaps find a secondary source of income. Your goal should be to save as much money as you possibly can to help ensure a long retirement.
Retirement savings accounts like IRAs and 401(k)s are the main source of retirement income for many Americans. One of the best ways to retire early is to build up these accounts as quickly as possible by contributing the maximum amount allowed by law each year. You can contribute up to $23,000 (in 2024) to your 401(k) if you’re under the age of 50. If you’re age 50 years, you can make an additional catch-up contribution of $7,500, bringing the total annual 401(k) contribution limit in 2024 to $30,500.
Additionally, you can contribute up to $7,000 to your traditional or Roth IRA in 2024 if you’re under the age of 50 and meet other requirements. If you’re 50 years of age or over, you can make an additional catch-up contribution of $1,000, bringing the total 2024 IRA contribution limit up to $8,000. The IRS generally raises contribution limits for all types of tax-advantaged retirement savings plan annually to account for cost-of-living changes.
It’s important to keep in mind that if you plan to tap your 401(k) or IRA to retire early, you may be subject to an early withdrawal penalty. This depends on how old you are when you retire: If you’re under age 59½ when you start making withdrawals, you may have to pay a 10% early withdrawal penalty on distributions from a 401(k) and a traditional IRA.
Pensions and Social Security Income
Also consider other potential sources of retirement income, such as a company pension plan. If your employer offers a pension plan, talk to your human resources contact to find out if you can receive benefits if you retire early. Then factor this income into your retirement budget.
Of course, you’re likely planning on Social Security benefits comprising a portion of your retirement income. If so, keep in mind that the earliest you can begin receiving Social Security retirement benefits is age 62. And if you start receiving Social Security retirement benefits before reaching your “full retirement age” — which is 67 if you were born in 1960 or later — your monthly benefit amount will be smaller than if you wait until your full retirement age.
The flip side of planning to ensure adequate retirement income is reducing your living expenses during retirement. For example, many people strive to pay off their home mortgages early, which can possibly free up enough monthly cash flow to make early retirement feasible.
Plan in Place
It’s never too soon to start planning for retirement. But if you want to retire early, you should ideally put a plan in place while you’re still in the early stages of your career. By saving as much money as you can while you’re still working, carefully planning your Social Security distribution strategies and cutting your living expenses in retirement, you just might be able to make this dream a reality.