Early retirement: Navigating challenges and achieving success

Why early retirement can be tough to pull off

Before we get into strategies for early retirement, let’s talk about some of the factors you’ll have to overcome.

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. You can’t access some sources of retirement income

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 59 ½. And when it comes to Social Security, the earliest you can access it is age 62 (and even then, you will receive a greatly reduced benefit for taking benefits before your full retirement age). 

3. Navigating health insurance

Social Security isn’t the only government benefit reserved for seniors. If you’re planning to use Medicare for health care 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 health care until you turn 65. 

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

So it’s clear that retiring early is tough – but it’s not impossible. 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 59 ½. 

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 59 ½ 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 health care 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 type, it might mean opening up an online shop to sell your creations, 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.

Retiring on your terms and timeline

Retiring early isn’t easy, and it’s not as simple as saving a lot in your 401(k). But there are strategies that can make it work. 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. And it’s 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 9-5 earlier than you thought. 

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