How to Retire Early: What You Need to Do

Early retirement may be more than an idle dream for Millennials.

Driving this early-retirement push, at least in part, is the desire to make personal choices and pursue passions or causes without worrying about money.

Rising healthcare costs and longer lifespans, among other factors, already require substantial assets for older generations retiring in their 60s and 70s to live comfortably. Millennials, facing uncertainty surrounding future Social Security benefits and a decline in old-fashioned company pensions, may need to amass greater wealth.

Millennials will need to expand their nest eggs even earlier in their careers if they want to leave the workforce a few years early, before they’re old enough to withdraw from retirement accounts without penalty or sign up for Medicare.

If you're pondering early retirement, keep in mind that you could need this money to last for 30 or 40 years, maybe longer, depending on when you take the big step.

So what moves can you make now to retire early — later?

The most important tip might be to start saving early and keep at it.

“The biggest benefit in any savings plan is time. If you start putting money away at a younger age and you're consistent with it, you've got a long runway and you're going to amass a fair amount of money," said Irene Damaryan, a senior wealth planner at City National Bank. “You've got the luxury of time."

But retirement savings alone likely won't be enough to retire early and maintain your current lifestyle. Fortunately, planning early can make it possible for you to optimize your retirement savings and also explore other ways to build the wealth you need to support you in early retirement.


Maximize Your Retirement Savings

Before you begin planning for early retirement, ensure you have built a budget and emergency fund. Damaryan recommends amassing enough funds to cover three to six months of expenses in case of emergency.

Once you have those things in place, she said, "then you can start thinking about retirement." In fact, your budget, along with rent, utilities, groceries and other expenses, should include a line for paying yourself, according to Damaryan, who advocates the "pay yourself first" concept and putting at least 10% of your income, if not more, away into retirement savings.

If your company offers a 401(k) retirement plan, opt in and start participating as soon as possible, making sure you are contributing enough to get the maximum employer match. 

"If you contribute nothing, your employer's going to contribute nothing, so you're leaving free money on the table," said Damaryan.

Contribute enough to get to the maximum match, but if possible, don't stop at the matching percent. Workers under age 50 may contribute up to $22,500, and those 50 and over may contribute up to $30,000, to an employer 401(k) in 2023.

Whether you stow money in a bank account or a retirement plan like a 401(k), time allows you to supercharge your savings through compounding — earning interest or investment returns on both the funds you deposited and the interest or gains themselves. It's very difficult to save a large amount of money later in life, when you are playing catch up, Damaryan noted. “It's really important to start early."

Because your 401(k) contributions are considered pretax, they lower your taxable income, and by extension your income tax liability. You'll pay taxes on the funds later, when you withdraw them in retirement.

Beyond the workplace, you can turn to traditional or Roth IRAs, which place lower caps on annual contributions — $6,500 for those younger than 50, and $7,500 for those 50 and over in 2023.

If you already have a workplace retirement plan and make less than $73,000 as an individual taxpayer, or $218,000 filing jointly in 2023, or at any income without a workplace plan, contributions to a traditional IRA may occur on a pretax basis, similar to a 401(k), lowering your income tax liability in the current year and deferring taxes until you take distributions in retirement.

A Roth IRA, on the other hand, won't lower your tax bill now, but you won't have to pay taxes on any withdrawals in retirement, including all appreciation, which would be subject to ordinary income tax in a traditional IRA. Another advantage is that you will not have required distributions at age 72, as with a traditional IRA, and if you do not need to make withdrawals, it could be a useful tool for passing wealth tax-free, or mostly tax-free, to your heirs.

If you already have a workplace plan and make more than the limits discussed above, and can afford to save more, it may still be a good idea to utilize an IRA to increase retirement savings. At this income level, you are not allowed to contribute directly to a Roth IRA. However, you may still utilize the “backdoor Roth” strategy. How this works is, you contribute to a traditional IRA, and since contributions are non-deductible anyway, you may immediately (within a day or two) convert those contributions to a Roth IRA, and all appreciation going forward is tax-free. Appreciation at the time of conversion would be taxable, but since you convert pretty quifkly, you avoid tax. This strategy could allow an additional boost to savings, and if not used during life, an additional boost to the wealth your heirs eventually inherit, Damaryan noted.

If you are looking at early retirement, your original contributions to non-deductible accounts are always tax-free. However, withdrawals of deductible contributions and any appreciation before the age of 59 ½ may trigger taxes and a 10% penalty, so it is a good idea to also save into non-retirement accounts to ensure you have enough to use at an earlier age.

You may also want to explore other wealth-building options that will support you in retirement.


Additional Ways To Build Wealth for Early Retirement

To build wealth and retire early, consider ways to make money outside your primary income source.

Damaryan noted three possibilities for generating extra income: entrepreneurship, investing in rental or commercial property, and investing in the stock market.

You might start a side business, perhaps switching to it full-time if it becomes lucrative enough. But entrepreneurship is challenging and may not be for everyone, especially if you have a career you love.

Another option is through investment properties. You might start small by buying a condo or house and renting it out, then continue to acquire residential or commercial properties, she said.

"If you select the right properties in the right areas, you can realize a good income from the net cash flow. Most people who do this self-manage the properties, which answers the question, 'What will I do tomorrow morning when I'm retired when I don't have to go to work?' But you can also engage a property manager if your investment property portfolio is large or if you don't want to manage them yourself," said Damaryan.

The risks are real, including vacancies, bad tenants, capital improvement expenses or a property that becomes undesirable due to a declining neighborhood or natural disaster.

"Real estate is a great investment but it is illiquid; if you need to sell a property, the timing may not be favorable," she added.

But, if you've built the right portfolio of properties, it can provide you with additional income in retirement.

The stock market presents a less labor-intensive and more liquid investment, with dividend-paying stocks a potentially good income source, she said, noting that the underlying stock itself presents the main risk.

Both options bring capital gains risk, that is, you'll pay up to 20% tax on the gain if you sell, but if you hold on to them, your heirs may inherit the assets at market value at the time, receiving a step-up in basis, reducing the capital gains on the investment if they decide to sell in the future, according to Damaryan.



Like anyone planning retirement, you'll need to protect yourself and your family with proper estate planning, powers of attorney, trusts, and insurance that covers typical care and worst-case scenarios.

If you're contemplating retiring before you're old enough to sign up for Medicare at 65, your planning should include making sure you have adequate health coverage.

Life and disability insurance exist primarily to replace your work income, so if you're a Millennial with young children and another 20 years to work, make sure to have insurance in place to protect yourself and your family in case of your untimely death or disability.

Long-term care is the most expensive need a person may face in their later years. Look into long-term care insurance at 50, or consider hybrid policies that allow you to access a whole-life insurance policy for long-term care needs if necessary, said Damaryan. Many people forgo LTC policies because they're so expensive, but should view them the same as auto or home insurance.

Alternatively, you might earmark a piece of property or account to cover that cost if the need arises, but either way make sure you are prepared, and do what you can to take care of your health, said Damaryan. 


Getting Started With Your Early Retirement Planning

The details for achieving the early-retirement dream are crucial, but it's also important to know why you're going that route and what you plan to do with your time. Does your partner want to retire early as well? Does he or she share your retirement plans and dreams? What do you want to do beyond relaxing on a beach or playing golf?

"That's an important part of this whole conversation," said Damaryan, who suggested Millennials start early to explore things they might be interested in and develop a plan.

If you're planning for retirement, consider working with a lawyer and a wealth planner to make sure you're covering the bases. City National Bank's team offers the expertise to help you set out and stay on the right path.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.