You must be at least 62 to begin collecting payments from social security, although you'll receive reduced benefits claiming at that early age. You must now be 67 years old to receive your full social security benefits. Despite this, it's actually possible to retire in your early 30s or 40s without winning the lottery.
Ultimately, you simply need to have enough money saved that you can live off of for the rest of your life. This may sound complicated, but it's actually quite simple to achieve if you follow my guidelines. Obviously, the younger you start this aggressive plan for an early retirement, the sooner you can actually retire.
Retirement Plan & Budgeting
Before you can actually begin trying to save to retire early, you need to develop a plan. In particular, you need to know your annual expenses. Your goal is to save 30 times that amount. When you reach this goal, you can retire and use the funds for the rest of your life if you manage them correctly.
I like the retirement plan calculator by BankRate. Everything is found on one page and you can easily play with the numbers to fine-tune your calculations. The only negative about it for me is that you can't adjust the "Income required at retirement" setting below 40% of the current income level you provide.
Here's one sample plan for someone that doesn't start until finishing college at 22. They make good money and live very cheaply. This allows an aggressive savings contribution to their retirement fund. By 37 years old, enough money would be saved in this scenario to live well beyond 92 and not be broke. In fact, this calculation is based on the minimum allowed 40%, but you could likely live much cheaper than that in retirement, especially if you've been living cheaper while you save to retire. It also doesn't consider collecting some social security income once you reach the allowed retirement age.
Making a six-figure income but living like you make minimum wage is ultimately the perfect combination to retire in your 30s. The less you have to spend on bills each month, the more you're able to aggressively save to retire early.
Slashing all unnecessary spending is usually needed to reach these goals unless you're making a very comfortable income. Some people will take very drastic measures to live an extremely minimalistic lifestyle, such as living in a van. These strategies can actually let you save 80%+ of your income, which can very quickly snowball into a million or two in your retirement fund.
The extremes you're willing to go to be able to retire early can vary based on your goals. Someone with a lower income will simply need to get much more aggressive with the saving and expense cutting to reach the same retirement goals while still in your 30s.
Income Level & Retirement Age
The savings plan I showed you above can actually work at any income level. The bad news is that the plan requires saving 90% of your income. If you're only making $40k a year, that would require living on only $4k per year from the time you're 22 until you retire at 37. That's going to require very extreme measures to accomplish unless you have someone that would allow you to live with them without paying rent or utility bills.
Take a look at this different savings plan based on making $40k per year. You need to start saving at 18 years old in this scenario, but you only have to make $40k per year to start. Best of all, you contribute 70% of your income for this plan, so you'd actually get to live on $12k with this approach. You could also retire as early as 35 or even sooner if you save more than 70%. Technically this retirement fund would be exhausted at 90 years old if you retire at 35. However, the plan doesn't factor in any social security earnings and the average lifespan doesn't even reach 90, so it would work for most people.
Financial Independence, Retire Early (FIRE)
There has actually been a movement since the early 90s that teaches the strategy above. They view every penny spent as a necessary expense or else it gets saved instead. Saving up to 70% of your annual income is one of the key points to this strategy that makes it work. As you can see from my examples above, you'll have to start from a young age practicing those habits if you have any hope to retire at 35.
Ultimately, trying to retire at 35 is probably a bit too aggressive. Most people don't even start thinking about saving money when they're 18 years old. I didn't even start until my 30s. However, this doesn't mean that an aggressive retirement strategy like this is worthless to me. In fact, it's quite the opposite.
Anyone that hasn't started saving for retirement at 30, 40 or even 50 years old will simply not be able to follow a traditional path contributing 10% - 20% of annual earnings to a retirement fund. When you get this late of a start, you will need to pretend like you are 18 and want to retire at 35-37. For someone that is currently 50 years old, following that same path would let them retire at 67 - 69 years old. Anything less than this very aggressive plan will simply fall short of providing enough money to continue to pay your bills without working.
Retirement Fund Withdrawals
After save up 30 times your annual expenses and actually retire, you will have to withdraw month from that retirement fund each year to pay your bills. Taking no more than 4% per year is a fairly standard rule, but when you retire 30 years early you need to be more careful about your funds running out. Sticking to 3% a year when retiring early can be a much safer bet. As you get older and your expenses rise with inflation, you may be able to increase your withdrawal rate to 4% once you hit 65 - 67 if you still most of your funds left at that time.
Another potential option is to completely avoid withdrawing any money from your retirement savings. When you reach retirement age and will need to access your money soon, you can switch all of your investments to fixed income securities. Bonds, REITs, dividend paying stocks and other options can provide you with monthly or quarterly payments as interest on your investment.
Even if you can only earn 3% per year from fixed income investments, a $2 million purchase would provide $60,000 per year in income. Simply withdraw your interest payments and leave your initial investment alone. You'll never have to worry about running out by retiring early this way.