How to Make an Early Retirement Decision

The average age at which retirements start in the United States has fallen to 63, according to the Social Security Administration. That is about five years earlier than people retired, on average, just 50 years ago.

This trend means that the concept of “early retirement” has gradually changed over time. For example, your grandparents may have believed that leaving the workforce before age 65 was early. Now, millions of Americans are retiring in their early 60s, and a growing number are confronting retirement decisions in their 50s. As attitudes have changed, there is no longer a stigma attached to “empty nesters” who want to enjoy life more while they are healthy and active. In fact, most people now believe that the ability to wave the workforce goodbye before age 60 has become a sign of status and success.

But is early retirement a viable option for you? The answer is far from simple, because it may require in-depth analysis and planning, plus consideration of the retirement lifestyle you hope to enjoy. Often, there are financial gaps to fill in early retirement—such as health insurance—plus opportunities to create new personal habits and interests. Delaying the onset of retirement by a few years often can be a smart move, fiscally and emotionally. But in some cases, early retirement buy-out packages or incentives offered by employers may not be available if you wait.

Some Basic Facts

Let’s focus on a few basic facts that may help you put an early retirement decision in perspective.

  • According to the Social Security Administration, the average life expectancy in the U.S. from age 60 is about 20 more years for men and 23 more years for women. If you retire at age 60, you should plan on living into your early 80s, at least.
  • The earliest age of eligibility for Social Security retirement benefits is 62. But for people born between 1943 and 1954, the age at which full benefits can begin currently is 66. If you start retirement benefits before this age, they will be permanently reduced.
  • The current age of eligibility of Medicare, the federal health insurance program for retirement people, is 65. Many people who retire before age 65 must fill a health insurance gap, unless their former employer agrees to continue coverage.
  • Future changes will need to be made in both Social Security and Medicare to keep these programs solvent. The long-term outlook for both programs is uncertain.

Prospective on the Decision

The first step in deciding when you can afford to retire is to project an inflation-adjusted income that you will need to maintain your retirement lifestyle. For example, suppose that you will need $4,000 per month in the first year of retirement and believe inflation will average 4% per year. Given those assumptions, you would need $8,764 per month by the 20th year of retirement. (See table below for amounts in other years.)

A financial professional can help you estimate whether your assets and retirement benefits will provide the income you need. Also, the professional can identify gaps in your insurance coverage and opportunities to use all of your assets most productively.

Whenever you decide to retire, it’s important to enter your “golden years” with a positive frame of mind that you can maintain your standard of living for as long as you live. While it is possible that you may start a new career or business, receive an inheritance, or invest very successfully, it’s prudent not to count on these possibilities too much. Plan conservatively, and your confidence in making a smart decision will increase.

A Retirement Income Planning Tool

Use the table* below to estimate how much retirement income per month you may need in the future per $1,000 of monthly income in the first year of retirement. Example: At 4% assumed inflation, in 20 years you would need $2,191 for every $1,000 you need in the first year of retirement.

Year of Retirement Assumed Inflation Rates
3% 4% 5%
5 $1,159 $1,217 $1,276
10 $1,344 $1,480 $1,629
15 $1,558 $1,801 $2,079
20 $1,806 $2,191 $2,653
25 $2,094 $2,666 $3,386
30 $2,427 $3,243 $4,322

*The figures shown are examples, for illustrative purposes only, and do not reflect actual or projected rates of inflation in the future.