How to Retire 10 Years Early

An online search for “early retirement” will yield millions of results, many of those about retirees who saved aggressively and exited the workforce before age 40.

But most people have a more approachable target in mind: According to a new NerdWallet survey, Americans who aren’t yet retired but plan to retire say they plan to leave full-time work at age 57, on average. That still qualifies as early — it’s a decade before the full Social Security retirement age of 67 — but it's achievable without making punishing cuts to your budget. Here are five steps you can take to hand in your notice 10 years early.

1. Save more

The earlier you want to retire, the more you need to save. For traditional retirement, experts generally recommend saving 10% to 15% of your pre-tax earnings. For example, let’s say you’re 22 and you make $40,000 a year. If you save 10% of your income, get a 6% average annual return on your investments and want to retire at age 67, you could leave the workforce with around $1.13 million. That’s likely enough, assuming you spend 70% of your pre-retirement income annually in retirement and have a life expectancy of 85. (All of this is according to NerdWallet’s retirement calculator, which assumes 2% salary increases per year, 3% annual inflation and a 5% investment return once retired.)

But let’s say you want to leave work at age 57. With all the same assumptions in place, you’d only have around $570,000 when you retire, which isn’t enough to cover your expenses without drastically reducing your lifestyle during those later years. According to the calculator, to have enough to retire at 57, you’d need to save more than double — roughly 22% of your pre-tax income each year.

That’s a significant difference, but if you plan on retiring early, spending less and saving earlier in your career is especially critical because it gives your money more time to grow.

2. Know your number

According to the survey, more than 1 in 5 Americans (22%) say they don’t know much they will need to retire comfortably. Replacing 70% of your pre-retirement income is a common rule of thumb, but you can customize that for your circumstances. For instance, you likely don’t need as much if you pay off your mortgage before leaving the workforce. Or you might need more if you have a long bucket list of travel on your retirement agenda. So play around with a retirement calculator or work with a financial advisor to find a retirement goal that works for you. 

3. Allocate accordingly

It’s often recommended that you shift your investments to become more conservative as you approach retirement age. But retiring early means you’ll spend more time in retirement, which generally calls for a more aggressive portfolio — you need the money you’ve invested to continue to grow. While you technically could retire with an all-stock portfolio, it’s generally considered safer to keep a mix of assets — stocks, bonds and cash — so your retirement plans aren’t thwarted by a market downturn.

A good action plan might be maintaining a more aggressive asset allocation — or, more heavily weighted toward stocks than bonds or cash — for the bulk of your portfolio but shifting a few years' worth of spending money into cash or more conservative investments. This will give you a pool of cash to draw on for the first few years, so you don’t need to tap investments in the event of a down or volatile market.

4. Understand withdrawal rules

Because retirement accounts are often tax-advantaged, they typically have rules about when you can withdraw your funds. For example, if you take your money out of a 401(k) before age 59 ½, you may pay a tax penalty for doing so (though there are exceptions). Likewise, Social Security isn’t available until age 62, and you’ll take a hit for drawing on your benefits before age 67.

For those retiring early, it may be a good idea to use a variety of accounts to save for retirement, including a Roth IRA and a taxable investment account. Contributions to a Roth IRA can be withdrawn at any time without penalty. Taxable accounts aren’t tax-advantaged, so that money is yours to withdraw whenever you’d like. Ensure you know the withdrawal rules for each account to avoid surprise penalties. And consider talking to a financial advisor to understand how your withdrawals will be taxed and to create a strategy for tapping the right accounts at the right time

5. Consider part-time work in retirement