Key takeaways

  • It’s important to understand that planning for an early retirement involves emotional readiness as well as your age and financial security.

  • Preparing for early retirement can include maxing out your retirement savings and planning both expected expenses, like healthcare, and unexpected expenses.

  • A financial professional can help you understand how to build an early retirement plan that accounts for increasing lifespans, taxes and other factors.

Everyone, regardless of their financial position, should prepare for early retirement as part of their long-term financial planning process. But it’s not just about how much money you’ll need to retire early.

When evaluating early retirement, it’s essential to think beyond financial independence and age. For example, assessing your readiness for unexpected life events is just as important as your post-retirement plan for staying active, healthy and engaged in your community.

 

Evaluate your eligibility for early retirement

Whether you’re in your 40s, 50s or 60s, the first step is to evaluate your current financial situation, align it with your long-term retirement goals and take steps to bridge any gaps that may exist between the two.

For example, many people are unclear about their early retirement funding sources. You might have been making regular contributions to a 401(k), for example, but you might have to pay penalties on early withdrawals if you access that money before you turn 59 1/2.

And your Social Security eligibility won’t start until you turn 62. “If you’re retiring at 55, Social Security won’t be available as a source of income for some time,” says Ryan Peters, Senior Wealth Planner with U.S. Bank Private Wealth Management.

“I’ve seen people opt for early retirement as early as 40. It really just depends on the individual’s lifestyle goals and whether they've prepared enough to go into retirement and feel fulfilled past that date.”

Ryan Peters, Senior Wealth Planner, U.S. Bank Private Wealth Management

He reminds all early retirees to have a plan in place that factors in savings, taxable investments, passive income streams and other sources of funding. That way, you won’t prematurely deplete your assets.

These considerations are especially important at a time when people are living longer in general, and where many are opting out of full-time work earlier and earlier. Where “early retirement” has traditionally been defined as leaving work prior to reaching the Medicare age of 65, Peters says that age continues to go down.

“I’ve seen people opt for early retirement as early as 40,” he notes. “It really just depends on the individual’s lifestyle goals and whether they've prepared enough to go into retirement and feel fulfilled past that date.”

 

Emotional considerations of early retirement

In many cases, that feeling of fulfillment can be more important than having ample available funds to carry you through your retirement years. The emotional aspects of early retirement, particularly for those with lengthy careers and no real plans for “what’s next?,” deserve equal attention when laying down the path for the future.

“I've seen some early retirees experience an identity crisis because their careers gave them a sense of identity and purpose in life,” Peters explains. “They ended up bored and unproductive, wondering what to do with their time.”

There’s also the possibility of inflationary and “down market” economic conditions after retirement that could require you to stretch your nest egg further than anticipated. Peters recommends working with a trusted financial advisor to plan for this and other issues. The earlier you start, the better.

“I believe it’s never too early to begin planning for retirement,” he explains. “If you start budgeting now, for example, you can set a trend for the future and help establish where you are and where you want to go in a world where we really can’t predict what's going to happen once you actually retire.”

 

Stress test your early retirement plan

Healthcare and long-term care costs are other must-haves that should be factored into your early retirement plan and that a financial advisor can help with. That advisor can also “stress test” any retirement plans using various what-if scenarios to ensure that your plan can withstand unexpected events.

For example, Peters always tells his clients to overestimate their expenses as they go into retirement, knowing that inflation and other economic forces can turn even the best laid plans on end.

“Being conservative and overestimating future retirement expenses can help,” says Peters, “because many times people underestimate how much they're spending annually, whether it's their monthly expenditures or large purchases like new vehicles and second homes. Make sure you’re accounting for those future goals and expenditures as well.”

 

8 steps to take if you’re considering early retirement

Ways to prepare to retire early include: max out retirement savings, avoid early withdrawals, control spending, eliminate or reduce debt, plan for taxes and healthcare, and build a diversified investment portfolio.

Along with evaluating your sources of early retirement funding and stress-testing any plan, here are some other steps Peters recommends you take now if you’re planning to retire early:

  1. Estimate your desired retirement savings and ensure that you will have those funds in place on the day you officially retire.
  2. Max out your retirement savings accounts and take advantage of catch-up contributions if you’re age 50 or older.
  3. Avoid early withdrawals not only because of the associated penalties, but also because doing so will chip away at your nest egg.
  4. Control your spending. “Many people assume that it’s enough to earn a salary and fund a 401(k), but if you're spending a lot now, you're probably also going to spend that much in retirement,” Peters points out. “If you want to continue living the same lifestyle, make sure you're budgeting properly and keeping your spending in check.”
  5. Eliminate or significantly reduce your debt. “If you’re retiring early, debt is not your friend,” Peters warns. “In fact, it can drain your accounts over time.”
  6. Plan for how taxes will affect your retirement finances. Without employment and/or business income to claim, your tax situation will likely change dramatically during retirement.
  7. Have a plan to pay for healthcare. If you retire before 65, you’ll need some other form of health insurance until you’re eligible for Medicare. One option is to purchase insurance on the federal marketplace at Healthcare.gov. If you currently have a high-deductible health insurance plan, contributing to a Health Savings Account (HSA) can help you cover healthcare expenses even into retirement.
  8. Build a diversified, inflation-protected investment portfolio. Look for other areas to reinvest your money that will yield the most benefit without creating unnecessary penalties or increased taxes. “If you’re younger than 59 1/2, for example, contributions to a taxable investment account would provide flexibility to your financial picture and be very beneficial when retiring early,” Peters says.

 

When it comes to early retirement, plan for the unexpected

Life doesn’t always turn out the way we planned, and early retirement can be just as unpredictable. Job layoffs or health issues could force you into an early retirement whether you’re ready for it or not, for instance. This could mean you have to navigate the intricacies of an early retirement package and start thinking about what hobbies, interests, travel opportunities or other activities you’d like to regularly take part in.

By factoring your financial situation, personal goals and life interests into your early retirement plan, you can come up with a well-rounded plan that not only helps you over the bridge to retirement but also ensures you enjoy the experience along the way.

“The biggest return you can expect from good planning is peace of mind, and that’s invaluable,” says Peters. “Implementing your planning strategies can feel like a weight has been lifted off of your shoulders, knowing that you're well prepared no matter what the future holds.”

Are you on pace to retire on your terms? Track your progress with our retirement calculator and learn how we can help you plan for retirement.

Related articles

How sequence of returns risk can impact when to retire

Sequence of returns is the risk that you’ll experience negative returns on your investments late in your working years and/or early in retirement. A retirement income strategy may help protect against the impact of market volatility.

How to know when to retire: 6 signs you’re ready

Knowing when to retire is a highly personal decision that involves your financial plan, emotional factors and other considerations. But there are ways to confidently answer the question, “Should I retire?”

Disclosures

Start of disclosure content

Investment and insurance products and services including annuities are:
Not a deposit • Not FDIC insured • May lose value • Not bank guaranteed • Not insured by any federal government agency.

U.S. Wealth Management – U.S. Bank is a marketing logo for U.S. Bank.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank does not offer insurance products but may refer you to an affiliated or third party insurance provider.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.

Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.