“Take this job and shove It,” sang the (ironically named) Johnny Paycheck, a number-one hit on the singles chart back in 1977. It’s a sentiment many people fervently share as they go about their workday grind. For many, retirement is the way out—and it’s something they would like to achieve sooner rather than later.

Sadly, that dream is all too often pushed aside when what should be the light at the end of the tunnel turns out be the headlight of a financial locomotive bearing down with the combined weight of inflation, healthcare, food, clothing, shelter, and all the other expenses that empty wallets and keep people trudging backing to work day after day.

Is there any hope for an early escape from the rat race? Let’s take a look at the realities of retirement for the average worker in the United States.

Key Takeaways

  • The standard full retirement age is in the process of being raised from 65 to 67, and the latter will apply to all workers born in 1960 or later.
  • You can start taking Social Security benefits at age 62, but they will be considerably less than what you will get if you wait until full retirement age.
  • Employer-sponsored retirement plans, such as a 401(k), come with a 10% early withdrawal penalty if you are under age 59½.
  • You may gain access to the money in your 401(k) at age 55 without penalty if you execute a “separation of service” from the employer that sponsors it, meaning you have to quit your job to get your cash.

Standard Retirement Age

Age 65 was once the magic number for retirees. Once you hit that age, you were eligible for full Social Security benefits and could trade your day job for a paycheck from the government. For younger workers, that’s no longer the case. A graduated scale of eligibility, shown below, increases the age for eligibility to receive full retirement benefits from age 65 for workers born in or before 1937 to age 67 for workers born in 1960 or later.

Year Of Birth Age To Receive Full Social Security Benefits
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-54 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67
Figure 1

Early Out

If you wish to quit earlier than your full retirement age, partial Social Security benefits are available at age 62. Just be aware that not only are your benefits cut if you take this option, but so are the spousal benefits due your significant other (if your spouse has earned little or no benefit on their own).

Your spouse is eligible to receive 50% of your benefit amount, based on the amount you would receive at full retirement age. That 50% is then reduced by the amount listed in Figure 2 below. If your spouse earned enough income to receive a benefit of their own that is larger than the amount provided under your benefits, the larger benefit applies.

Year Of Birth Approximate Reduction For Primary Wage Earner Spouse Reduction
1937 or earlier 20.00% 25.00%
1938 20.83% 25.83%
1939 21.67% 26.67%
1940 22.50% 27.50%
1941 23.33% 28.33%
1942 24.17% 29.17%
1943-54 25.00% 30.00%
1955 25.83% 30.83%
1956 26.67% 31.67%
1957 27.50% 32.50%
1958 28.33% 33.33%
1959 29.17% 34.17%
1960 or later 30.00% 35.00%
Figure 2

If you have an employer-sponsored tax-advantaged retirement savings plan, such as a 401(k) plan or 403(b) plan, age 59½ is when you can generally access your money with no penalties for early withdrawal. Caveat: It has to be from a previous employer’s plan (no problem if you’re retired); if you’re still employed, you may or may not have access to your current employer’s plan. You can read the details on the Internal Revenue Service (IRS) website. Combined with the extra cash from Social Security, it could be enough to help you get out of the game before you reach the traditional full retirement age.

When considering early retirement, think about the mental and emotional challenges as well as the financial ones.

Earlier Out

If you want to opt out of the workforce even earlier, you can consider doing so before age 59½ provided you have a significant nest egg in your employer-sponsored savings plan. Instead of waiting for Social Security eligibility, you can shave off a few working years by accepting “substantially equal periodic payments” from your employer’s plan for at least five years or until you turn 59½ (whichever is longer). This is one of the exceptions under Rule 72t.

You can gain earlier access to the money in your 401(k) at your current employer—during or after the calendar year when you turn 55—by engineering a “separation from service,” which the IRS defines as “a bona fide termination of employment in which the employer/employee relationship is completely severed.” In other words, you have to quit your job at that age, and you gain access only to your most recent 401(k) from the job you just left.

The downside of doing any of these things is that you don’t want to damage your eventual Social Security benefit by having too many years where you don’t earn an income factored into the calculation that determines your benefit. If you have a high-paying job, the last few years of your career are likely to represent your highest lifetime earnings. 

Another option is to take a part-time job. This puts money in your pocket and may provide medical benefits. You will need to keep this job for less than a decade before you become eligible for Social Security. Working part-time also serves as a transition that will help you acclimate to the massive lifestyle shift that occurs when you go from working all week to having no job at all.

Earlier Still

If age 55 isn’t early enough for you, chances are you will need to be rich, frugal, or both in order to retire. If you’re rich—which we will define as having enough money that you don’t need to work at all—then you are in great shape.

If not, you’ll need to figure out just how little you can live on. Are you willing to trade that upscale condominium for a cabin in the woods? Can you give up fine dining, new cars, new clothes, and vacations to Europe for a rocking chair, a hiking stick and the sound of the wind in the trees? If you can handle massive lifestyle changes and the spending habits they require, you may be able to retire on your own terms at an age significantly younger than most retirees.

Considerations

Regardless of your age when you decide to step out of the workforce, you’ll have to put some serious thought into the risk of outliving your savings. With life expectancies on the rise, your income stream drying up is a very real possibility, particularly if you received a lump-sum payout to retire early.

Of course, smart investing can help you overcome this challenge, but you need to carefully balance the need for income against the need for growth. Low-risk investments, such as certificates of deposit and Treasury inflation-protected securities, can provide an income stream, but you will likely need exposure to equities to see your assets grow. Adding equities is a double-edged sword, though, as the potential for gain also exposes you to the possibility of loss. An annuity can provide a guaranteed income for life and is a solution more suited to your later years, but it also comes with downsides, especially the effect of inflation on a fixed income.

Beyond the financial considerations, you also need to think about the mental aspects of early retirement. Many people identify themselves by the work they do. Once they stop working, the loss of identity can be a challenge. Similarly, many people rely on their coworkers for social interaction. When they stop working, they lose many of their friends.

Before stepping out of the workforce, make sure that you are both financially and emotionally prepared to deal with the consequences. Making the change is a life-altering event. Advance planning can help you set a solid course as you start the next stage of your life.

The Bottom Line

The Social Security system is not designed to support early retirement, so if you want to stop working ahead of schedule, it will take some extra planning. However, you do have options, especially if you can live frugally or have already accumulated a substantial nest egg. Consider both the financial and emotional impacts of retiring early to make the best decision for your situation.