6 Signs You're Ready to Retire Early

Don’t leave until these signposts show you’ve covered all the bases

Are You Ready to Retire?

If you’re considering retiring early, you’ll forego not only the headaches of working but also the additional earnings that could have made your retirement even more comfortable. Make sure you’re truly ready before you leave.

Key Takeaways

• Start debt free, with a solid retirement account that will support your extra years not working.
• Make sure you can withdraw some money from your retirement accounts without penalty.
• Plan to pay for your own healthcare coverage until Medicare kicks in.

Here are six signs you may be able to retire early instead of continuing to work.

1. Your Debts Are Paid Off

If your mortgage is paid off and you don’t have any loans, credit lines, large credit card balances, or other debt, you won’t have to worry about making large payments during retirement. This leaves your savings and retirement income available to enjoy life and free to use in the event of an emergency.

2. You Have Ample Savings

You planned and set a goal for retirement savings. Now your investments meet or exceed the amount you were hoping to save. This is another good sign you could take early retirement.

If you didn’t plan for early retirement, you will need to recalculate how long your savings will last. Also, depending on your age, you may not yet be eligible for Social Security or Medicare.12 Your savings will need to cover your expenses until you reach the eligible age.

Keep in mind that if you do leave work several years before you planned to, your savings must be enough to cover these additional retirement years.

“Think ‘Rule 25.’ Prepare to have 25 times the value of your annual expenses,” says Max Osbon, partner at Osbon Capital Management in Boston, Massachusetts.

The Rule of 25 is used by many participants in the Financial Independence, Retire Early (FIRE) movement, and it depends on a 4% maximum portfolio withdrawal rate (adjusted for inflation). Many experts, though, question the validity of the 4% guideline, especially for folks who plan to retire early.34 Since the 4% rule for retirement budgeting only allows for safe withdrawals for about 30 years, this means it may not provide sustainable income for individuals who retire early.

3. You Can Get at Your Savings

No one likes to pay unnecessary penalties.

If your 59th birthday was at least six months ago, you’re eligible to take penalty-free withdrawals from any of your 401(k) plans.5 These policies generally apply to other qualified retirement plans, but there are exceptions.

For instance, the 457 plan doesn’t have an early withdrawal penalty.6 But remember that you’ll still pay income tax on your withdrawals.7

There’s also good news for wannabe early retirees with 401(k)s. If you continue working for your employer until the year that you turn 55 (or after), the Internal Revenue Service (IRS) allows you to withdraw from only that employer’s 401(k) without penalty when you retire or leave, as long as you leave it at that company and don’t roll it into an individual retirement account (IRA).8

“There is a caution, however: If an employee retires before age 55 [except as noted above], the early retirement provision is lost and the 10% penalty will be incurred for withdrawals before age 59½,” says James B. Twining, CFP, founder and CEO of Financial Plan Inc. in Bellingham, Washington.5

The third option for penalty-free retirement plan withdrawals is to set up a series of substantially equal withdrawals over at least five years, or until you turn 59½, whichever is longer. Like withdrawals from a 457 plan, you’ll still have to pay income taxes on your withdrawals.910

If your retirement plans include any of the above penalty-free withdrawal options, it’s another point in favor of leaving work early.

4. Your Healthcare Is Covered

Healthcare can be incredibly costly, and early retirees should have a plan in place to cover the costs before becoming eligible for Medicare at age 65.11 If you have coverage through your spouse’s plan or if you can continue to get coverage through your former employer, this is another sign that early retirement could be a possibility for you.

Keep in mind that COBRA may extend your healthcare coverage for a period of time after leaving your job, although your costs with COBRA may be higher than other options.12

Another option for early retirees is to purchase private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses no matter what age you are.13

5. You Can Live on Your Budget

Retirees living on fixed incomes, including pensions or retirement plan withdrawals, usually have lower monthly incomes than they did when they were working.

Try practicing sticking to your reduced retirement budget for at least a few months before you actually retire. You’ll get a sense of just how easy or difficult it would be to make that lower budget permanent.

“Humans do not like change, and it is hard to break old habits once we have become accustomed to them. By ‘road-testing’ your retirement budget, you are essentially teaching yourself to develop daily habits around what you can afford in retirement,” says Mark Hebner, founder and CEO of Index Fund Advisors Inc. in Irvine, California, and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”14

6. You Have a New Plan

Leaving work early to spend long days with nothing to do will lead to an unhappy early retirement. Having a defined plan—or even the outline of a daily routine—can help you prepare.

Perhaps you’ll replace sales meetings with a weekly golf outing or a volunteer gig, in addition to adding daily walks or trips to the gym. Plan a long-overdue trip or take classes to learn something new.

If you can easily think of realistic, non-work-related ways to enjoyably pass your days, early retirement could be for you. In the same way you test-drive your retirement budget, try taking a week or more off work to spend your days as you would in retirement. If you become bored with long walks, daytime TV, and hobbies within a week, you’ll certainly get antsy in retirement.

What Is Retirement?

Retirement, fundamentally, is when you leave the workforce behind. The traditional retirement age is 65 in the United States. The full retirement age (when you can collect full Social Security benefits) is 66 or 67, depending on your birth year. The early retirement age is 62 (the earliest age you can collect Social Security benefits).

What Is Retirement Planning?

Retirement planning is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement. Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk, then starting to take action to reach those goals. The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets.

How Much Do I Need to Save to Retire?

The answer varies by individual, and it depends largely on your current income and the lifestyle you want and can afford in retirement. Many retirement experts recommend strategies such as saving 10 times your pre-retirement salary and planning on living on 80% of your pre-retirement annual income.

The Bottom Line

These are questions nearly all young and middle-aged workers have asked themselves: Should I leave my job and retire early? What would I need? How do I know I’m ready?

When it comes to deciding if you should retire early, there are several signs to watch for. The signposts also point to a number of plans you can make now to increase the chances that you could fulfill this dream if you end up wanting (or needing) to do so.

Article Sources

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1. Social Security Administration. “Starting Your Retirement Benefits Early.”
2. Medicare.gov. “Get Started with Medicare.”
3. Charles Schwab. “Beyond the 4% Rule.”
4. T. Rowe Price. “Six Steps to Achieve Financial Independence and Retire Early (FIRE).”
5. Internal Revenue Service. “401(k) Resource Guide—Plan Participants—General Distribution Rules.”
6. Internal Revenue Service. “Topic No. 558, Additional Tax on Early Distributions from Retirement Plans Other than IRAs.”
7. Internal Revenue Service. “IRC 457(b) Deferred Compensation Plans.”
8. Internal Revenue Service. “Retirement Topics—Termination of Employment.”
9. GovInfo. “26 USC § 72. Annuities; Certain Proceeds of Endowment and Life Insurance Contracts,” Page 397 (Page 11 of PDF).
10. Internal Revenue Service. “Substantially Equal Periodic Payments.”
11. U.S. Department of Health and Human Services. “Who’s Eligible for Medicare?”
12. U.S. Department of Labor. “Continuation of Health Coverage (COBRA).”
13. Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.”
14. Index Fund Advisors. “Index Funds: The 12-Step Recovery Program for Active Investors.”