Can I Retire Early? How to Know If You Can Afford Early Retirement

Can I retire early? It is one of the most common questions people ask when they start thinking seriously about financial independence.

Maybe you are tired of working full time. Maybe you want more time with your family. Maybe you have built a substantial investment portfolio and wonder whether you have accumulated enough to stop working. Or maybe you simply want the freedom to choose whether you work rather than having to work.

Whatever your reason, early retirement is not determined by your age alone. It is determined by whether your financial resources can support the lifestyle you want for as long as you need them.

That means answering a much better question than "How much money do I need?"

The better question is:

Can my combination of savings, investments, income, pensions, government benefits and other assets support my spending if I stop working now?

This article explains how to answer that question and what tradeoffs may make early retirement possible.

What Does Early Retirement Actually Mean?

There is no universal age that defines early retirement.

For one person, retiring at 55 may feel early. For another, leaving the workforce at 45 may be the goal. Someone pursuing FIRE, or Financial Independence, Retire Early, may want the option to stop working decades before traditional retirement age.

Early retirement is therefore better understood as retiring before the age you originally expected to stop working.

It also does not necessarily mean never earning another dollar.

Some people leave a full-time career but continue working part time. Others start a business, consult, freelance or earn seasonal income. Even a relatively small amount of earned income can significantly change the amount that must come from investments.

Early retirement can mean complete retirement, partial retirement or simply reaching the point where employment becomes optional.

Start With the Question: Can I Afford to Retire?

The first step is to determine what your retirement would actually cost.

Your answer should include the spending you expect after leaving work, not simply your current salary.

Consider:

• Housing costs
• Food and household expenses
• Transportation
• Insurance
• Healthcare
• Travel
• Entertainment
• Taxes
• Home maintenance
• Vehicle replacement
• Gifts and family support
• Other major future expenses

Early retirement can be particularly sensitive to spending because your portfolio may need to support you for several additional decades.

If you want to explore the broader question of how much you need to retire, read How Much Money Do I Need to Retire?.

Early Retirement Is a Different Calculation

Retiring early changes the financial equation in several ways.

First, you have fewer years of employment income. Second, you may have fewer years of contributions to retirement accounts and investments. Third, your portfolio may need to provide income for a much longer period.

At the same time, retiring later can provide additional savings, investment growth, pension accrual and government benefits.

Consider two people with identical investment balances.

If one retires at 50 and the other retires at 65, they do not have the same retirement plan. The person retiring at 50 may need to fund 15 additional years before the other person even stops working.

Retirement age is therefore one of the most important variables in an early retirement calculation.

The 8 Numbers You Need to Determine If You Can Retire Early

To determine whether early retirement is realistic, start with these eight numbers:

1. Your planned retirement age
2. Your annual retirement spending
3. Your current investment and savings balances
4. Your expected investment returns
5. Your reliable retirement income
6. Your expected taxes
7. Your planning horizon
8. Your expected future contributions and other income

None of these numbers should be considered independently.

A large portfolio does not automatically mean you can retire early. A relatively modest portfolio might be sufficient if spending is low and reliable income covers most expenses.

1. What Age Do You Want to Retire?

Start by choosing the age at which you would like to stop working.

You do not have to choose one age forever. In fact, it can be useful to compare several possibilities.

For example:

• Retire at 50
• Retire at 55
• Retire at 60
• Retire at 62
• Retire at 65

Then compare what happens under each scenario.

You may discover that retiring at 55 is possible, while retiring at 50 would require a substantial spending reduction. Or you may find that working two additional years creates a much larger margin of safety.

This is one of the most useful ways to think about early retirement. You are not necessarily trying to find one exact retirement age. You are trying to understand the range of ages that may be financially sustainable.

2. How Much Will You Spend?

Your spending target is arguably more important than your investment balance.

Someone who spends $40,000 per year has a very different financial requirement from someone who spends $100,000 per year.

This is one reason the FIRE community often focuses heavily on the relationship between annual spending and invested assets.

Reducing your retirement spending can have a powerful effect on the amount you need to accumulate.

However, do not create an unrealistically low spending target simply to make the math work.

A retirement plan is only useful if it represents the life you actually want to live.

3. How Much Do You Have Saved and Invested?

Next, determine how much financial capital you have available.

Include the investment accounts and savings that could realistically support your retirement.

Depending on your country and circumstances, this could include accounts such as:

• 401(k) accounts
• Traditional IRAs
• Roth IRAs
• RRSPs
• TFSAs
• Non-registered investment accounts
• Cash savings
• Other investment assets

Your total portfolio value is important, but account type matters too.

Different accounts can have different tax rules and withdrawal considerations. Access to your money can also matter when retiring particularly early.

4. What Return Are You Assuming?

Your future investment return is impossible to know with certainty.

Nevertheless, your retirement projection needs assumptions about investment growth.

Be careful about using an aggressive return assumption simply because it makes early retirement look achievable.

A stronger approach is to examine a range of possible outcomes.

What happens if returns are lower than expected? What happens if markets perform exceptionally well? What happens if poor returns occur early in retirement?

These questions matter because the order in which investment returns occur can have a major effect when you are withdrawing money from your portfolio.

5. How Much Reliable Retirement Income Will You Receive?

Your investment portfolio is not necessarily your only source of retirement income.

You may receive income from:

• Employer pensions
• Social Security
• CPP
• OAS
• Rental properties
• Part-time employment
• Business income
• Other reliable income sources

This income can substantially reduce the amount your portfolio needs to provide.

For example, imagine your retirement spending is $70,000 per year and you expect $30,000 of reliable income. Your investments do not necessarily need to generate the entire $70,000.

They may need to provide only the remaining amount, subject to taxes and how your income is structured.

This is why asking "How much do I have invested?" without also asking "How much income will I need from those investments?" can lead to misleading conclusions.

6. How Much Will You Pay in Taxes?

Retirement income is not necessarily the same as spendable income.

Taxes can affect withdrawals from retirement accounts, investment income and other sources of cash flow.

This becomes especially important when you have multiple types of accounts.

A retirement plan that ignores taxes can make your projected retirement income look better than it really is.

Conversely, a plan that considers the timing and tax treatment of different income sources may identify opportunities to improve after-tax income.

For a deeper explanation, read How Taxes Affect Your Retirement Plan.

7. How Long Might Your Money Need to Last?

Early retirement increases the importance of longevity.

If you retire at 50 and live to 95, your retirement could last 45 years.

That is a very different financial challenge from retiring at 67 and planning to age 85.

Nobody knows exactly how long they will live. Your plan should therefore consider a sufficiently long horizon and allow you to test different longevity assumptions.

Planning for a longer life may mean accumulating more assets, reducing spending, maintaining some income or using a combination of these approaches.

8. How Much Will You Continue to Earn or Save?

Early retirement does not have to be an all-or-nothing decision.

Suppose you want to leave your full-time career at 50 but could earn $15,000 per year through consulting or part-time work.

That income may significantly reduce the amount you need to withdraw from your portfolio.

Similarly, continuing to work for another few years can allow your investments to grow while you continue making contributions.

This is one of the most powerful early retirement tradeoffs to examine.

What Is the FIRE Number?

FIRE stands for Financial Independence, Retire Early.

The basic idea is simple: accumulate enough assets that investment income and other resources can support your desired lifestyle without requiring traditional employment.

A commonly discussed starting point is to multiply annual spending by 25, which corresponds to a 4% initial withdrawal rate.

For example, $50,000 of annual spending multiplied by 25 produces a $1.25 million portfolio target.

But this should be treated as a starting point rather than a universal answer.

Your actual situation may include taxes, pensions, government benefits, changing spending, housing, different investment returns and a retirement period much longer than the historical periods used to develop popular withdrawal-rate rules.

Your FIRE number is therefore better understood as a target to investigate rather than a guaranteed threshold.

Why Your FIRE Number May Change

Imagine that you initially calculate a FIRE target based on $60,000 of annual spending.

Later, you discover that you will receive $25,000 per year from reliable retirement income.

Or perhaps you decide to downsize your home. Maybe you plan to work part time for several years. Maybe you reduce your spending during certain phases of retirement.

Each of these decisions can change the amount your portfolio needs to provide.

That is why early retirement planning should be flexible.

Early Retirement Tradeoffs That Can Make It Possible

If your initial projection says you cannot retire as early as you would like, that does not necessarily mean the goal is impossible.

You have several variables you can change.

Save More

Increasing your savings rate can accelerate your progress toward financial independence.

Spend Less

Reducing retirement spending lowers the amount your portfolio needs to provide.

Work Longer

Even a few additional working years can provide more savings, more investment growth and potentially greater retirement income.

Work Part Time

Partial employment can reduce withdrawals while allowing you to leave a traditional full-time career.

Change Your Housing Plan

Downsizing, moving to a lower-cost area or changing your housing strategy may affect both your assets and annual expenses.

Adjust When You Start Retirement Benefits

The timing of pensions and government benefits can affect both income and the amount your investments need to provide.

Change Your Retirement Spending Over Time

You may not need exactly the same amount of money every year of retirement. Modeling different spending patterns can provide a more realistic picture than assuming one constant annual expense forever.

Do Not Make Early Retirement a Single-Scenario Decision

One of the biggest mistakes people make is testing only the scenario they hope will work.

If you want to retire at 50, do not build a plan that assumes everything goes perfectly.

Test multiple possibilities.

What if you retire at 50? What if you retire at 55? What if investment returns are lower? What if inflation is higher? What if you live to 100? What if you spend more than expected during the first decade? What if you work part time?

The purpose of testing is not to scare you away from early retirement. It is to understand how resilient your plan is.

Use an Early Retirement Calculator Carefully

An early retirement calculator can be extremely useful, but the quality of the result depends on what the calculator considers.

A simple calculator may ask for:

• Current age
• Retirement age
• Current savings
• Annual contributions
• Expected investment return
• Annual spending

That can provide a useful starting estimate.

A more comprehensive retirement model can go further by considering different account types, taxes, pensions, government benefits, housing, inflation and changing income or spending.

The more important question is not whether a calculator says "yes" or "no." It is whether you understand why the result looks the way it does.

How Retirementize Can Help You Test Early Retirement

Retirementize is designed to help you look at retirement as a complete financial picture rather than a single savings target.

You can build a retirement plan using your income, expenses, investment accounts, pensions, government benefits, taxes, housing and other important assumptions.

Then you can explore what happens when you change the decisions that matter.

For example, you can compare the effect of:

• Retiring earlier or later
• Changing your target retirement income
• Changing investment assumptions
• Adjusting spending
• Changing when retirement income begins
• Changing housing assumptions
• Testing different What-If scenarios

This can turn the question "Can I retire early?" into a much more useful conversation:

"What would I need to change to make early retirement more achievable?"

Early Retirement Is About Options, Not Just an Age

Financial independence is ultimately about having choices.

You may decide to retire completely. You may work part time. You may change careers. You may take a sabbatical. You may continue working because you enjoy it, but no longer because you need the paycheck.

Reaching financial independence can change the relationship you have with work.

That is why early retirement planning should not focus exclusively on a date.

The real goal may be achieving enough financial flexibility that you can make decisions based on what you want rather than what you have to do.

PLAN. IMPROVE. TEST. CONFIRM. REPEAT.

Early retirement planning fits naturally into a broader financial planning process:

1. PLAN. Define your desired retirement age, spending and lifestyle.
2. IMPROVE. Identify ways to increase savings, reduce expenses, improve income or strengthen your retirement strategy.
3. TEST. Compare different retirement ages, returns, spending levels and life expectancy assumptions.
4. CONFIRM. Determine whether the plan appears capable of supporting the lifestyle you want.
5. REPEAT. Update the plan as your savings, income, investments and goals change.

You do not need to predict the future perfectly. You need to understand how your plan responds to different futures.

Questions to Ask Before Retiring Early

Before leaving work, ask yourself:

• How much will I actually spend each year?
• How much do I have invested?
• How much reliable retirement income will I receive?
• How much of my income will come from my portfolio?
• Have I included taxes?
• How long might my retirement last?
• What happens if investment returns are lower than expected?
• What happens if inflation is higher?
• What happens if I live longer than expected?
• Could I work part time if necessary?
• Could I reduce spending if necessary?
• How does my housing plan affect the result?
• What happens if I retire five years later?

If you can answer these questions and understand the tradeoffs, you are in a much stronger position to make an informed retirement decision.

Fun Facts About Early Retirement

Continue the Financial Freedom Series

This article is part of the Retirementize financial freedom and retirement planning series.

If you are working toward early retirement, continue exploring:

• How Much Money Do I Need to Retire?
• Financial Freedom vs Retirement: What's the Difference?
• How to Create a Financial Freedom Plan
• 10 Ways to Improve Your Retirement Plan

You can also explore more advanced retirement planning topics, including Monte Carlo retirement simulations and retirement What-If scenarios.

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