Dreaming of an early retirement? Consider these key factors to decide if you have the funds you need to get a head start on your retirement.
What is early retirement age?
Retirement benefits kick in at a certain age — eligibility for Social Security benefits starts at age 62, and Medicare at 65. To withdraw money from your IRAs or 401(k)s without tax penalties, you must be 59 ½, generally speaking. Retiring before these milestones is considered early — and that’s exactly what the Financial Independence, Retire Early (FIRE) movement is all about.
Pros and cons of early retirement
Retiring early takes a lot of planning. The most significant challenge is ensuring you have sufficient savings to last potentially 40+ years. Healthcare costs can be especially substantial, and you’ll need to be able to bridge the gap until Medicare eligibility.
But if you’re able to build up the savings you need, you can enjoy financial independence and gain control over your time. You’ll be able to pursue passions and hobbies, explore new interests, travel, volunteer and spend time with family and friends while you're still young and healthy enough to fully enjoy your freedom.
Read more: How to reach your savings goals faster with smart savings tools from Ally Bank
Seven key steps to achieve early retirement
Consider these steps to see if early retirement could work for you:
1. Plan your annual retirement spending
A common retirement rule is to save enough to spend between 60% and 100% of your pre-retirement salary each year. These general guidelines still apply if you retire early, though you may want to keep your retirement spending on the lower end. Some factors to consider when estimating your retirement spending are:
Housing affordability
Recurring or long-term healthcare expenses
Hobbies, travel and experiences
Areas you can trim expenses
2. Calculate your total savings needed
Multiply your annual spending by the number of years you plan to enjoy your retirement, or use our free retirement calculator, to estimate your total savings. This amount might not account for everything, but planning for a financial buffer helps set you up for success.
3. Make adjustments to your current budget
Since you're allocating more money toward retirement savings, you'll need to adjust your current spending. If you aren’t already following a budget, now’s the time to set one up to keep your spending and saving on track. Automated spending and savings tools, like the ones offered at Ally Bank, can help you find ways to save while you spend and give your budgeting a boost.
4. Consider an HSA to plan for healthcare
Contributing to a Health Savings Account (HSA) can help reduce your health-related costs. Like a 401(k), HSA contributions, earnings and distributions put toward qualified expenses are not taxed. Depending on your plan, you may be able to invest these funds, meaning your HSA is another opportunity to prepare for retirement.
5. Establish a goal for eliminating debt
It’s possible to save and pay off debt at the same time. Follow these strategies to incorporate eliminating debt into your regular financial habits, so you can be debt-free by the time you retire.
A popular starting point toward a FIRE lifestyle is to max out your 401(k) contributions.
6. Max out your retirement accounts
A popular starting point toward a FIRE lifestyle is to max out your 401(k) contributions. For 2025, your maximum contribution is $23,500, not including catch-up contributions. Hitting that number is ambitious, so if meeting your max contribution isn't feasible, you have other ways to work toward your goal, like contributing to other investing account types.
7. Invest early and often
You've probably heard it before, but it bears repeating: The earlier you start investing, the more time you have in the market. A good place to begin is understanding your choices beyond a 401(k). For example, you might consider an IRA, or using automated trading tools. If you need advice on what’s best for you, consider working with a financial or wealth advisor.
Staying committed to your early retirement goals
Early financial independence is a big goal. By understanding the details of your plan and sticking to them, you can work toward enjoying your dream retirement on your terms.
