Last Updated: December 19, 2024

Part of planning for an early retirement involves taking a few crucial steps while you’re still working. Let’s take a look at some of them below. 

1. Draw Up a Workable Budget

Perhaps more important than any other step you’ll take (and applicable at any age, by the way!) is coming up with an all-encompassing budget for your household. Doing so will force you to look at how much you’re (really!) spending, where your money is going and where you can make cuts. 

Another consideration? Nail down your current monthly budget, then figure out what you think your monthly budget will look like once you’re in retirement. You’ll find subtle differences, like less money spent on gas, clothing and lunches out, but other expenses might actually increase in retirement (ahem - healthcare). Since you’ll be living without a paycheck in retirement, and for many years without even the assistance of Social Security benefits, it’s crucial to have a firm grasp on exactly how much money you’ll need to live on a month-to-month basis. 

Based on the previous lesson, “How Long Your Savings Will Last By Budget,” we show you how much you could afford to spend a month based on your net worth. However, your spending should account for monthly healthcare premiums, cost-of-living expenses, and any other taxes you’ll incur now and throughout retirement. 

2. Maximize Contributions to Retirement Accounts

Especially if you’re planning to retire in your fifties, you’ll need to have contributed the maximum amount possible to your retirement accounts over the course of your working years. You’ll lose out on a great deal of earning power if you exit the workforce this early, so it’s crucial to plan accordingly. Current contribution limits for 401k accounts are $23,500 and for IRAs, the limit is $7,000.

3. Make Catch-Up Contributions

Part of what you’ll miss out on by retiring in your fifties is catch-up contributions. Starting at the age of 50, you’re eligible to contribute more to your retirement accounts, like your 401k and IRAs. The catch-up contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for employees ages 50-59, remains at $7,500 for 2025. New for 2025, based on changes made under the SECURE Act 2.0, a higher catch-up limit of $11,250 now applies to employees ages 60-63 who participate in these plans. The IRA catch-up contribution limit for individuals aged 50 and over remains unchanged at $1,000.¹ 

4. Review Long-Term Care and Life Insurance

Proper insurance is another way to further protect your finances if you’ll be retiring before your earning years are over. While you’re still working, it’s a good time to ensure you’re covered with all the insurance you might need during retirement. We’ll touch more on this later in our lesson called, “Long-Term Care and Life Insurance.” 

5. Refinance or Downsize Your Home

This isn’t a step you’ll want to save for after retirement, when it’ll be harder to secure a good loan without a steady paycheck. So if you know you’ll save a great deal of money every month by refinancing your home, or if you’re planning on purchasing a much smaller dwelling to live out your retirement period, it’s best to tackle this before you retire. 

6. Fully Fund Your HSA

A well-funded HSA can be a huge help for anyone, but that’s particularly the case if you’re hoping to retire long before Medicare kicks in. All healthcare options for retirees who don’t yet qualify for Medicare are expensive; there’s no way around that (see Lesson “Early Retirement Healthcare Option” for a breakdown), and an HSA allows you to withdraw the money you’ve saved to use on qualified medical expenses at any age. 

You’ll pay more out of pocket for an HSA, but your working years are the best time to do this, since it’s easier to shoulder while you’re working rather than after you retire. You’ll end up with an HSA that can double as an investment vehicle once you turn 65. What’s more, you can continue to fund your existing HSA even during retirement (until you enroll in Medicare, that is). To learn more about HSAs, see our class “Health Spending Accounts (HSA).”

7. Review Portfolio Allocation

One thing you may wonder about as you approach retirement is whether your money is invested properly. Do you have the right mix of aggressive and conservative investments? It’s only natural to want to “de-risk” your portfolio as retirement approaches. But remember, if you’ll be retiring in your fifties, you’ve still got to account for three to four decades of inflation. So you want a mix of assets that allow mostly for safe growth, with a portion of more aggressive funds that can help protect your earnings and keep your future income similar to today’s. 

To determine the best asset allocation, first consider your budget: where do you stand as you approach your retirement years? Are your finances lacking anything, or do you have more than enough to make it through? In considering these questions, be sure to include all of your income streams for accuracy. 

Once you understand how much you need to rely on your portfolio to cover your spending, then you can determine how much risk you want to take in your portfolio. If you’ll be relying heavily on your investments for daily living in retirement, it’s important to avoid too much risk and keep  most of your money in more conservative investments, like the one shown below. 

But if you’re in your fifties with many years of retirement left and plenty of money saved, and you’re not yet relying on your investments to cover expenses, it’s perfectly okay to keep a larger portion of your investments in aggressive funds. 

8. Build an Emergency Fund

If you don’t already have one, a stash of liquid assets like cash at the ready is always a good thing to have before you retire. But in this case, more truly is better. Make it a goal to save six to twelve months of expenses if possible.

SOURCES

1. “401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.” IRS.gov, 1 November 2024, https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000. Accessed 1 November 2024.