The age of 55 seems perfect for retirement, but is it too early? If you’re thinking about retiring early, this is a question you may be considering. Early retirement might free you up to pursue passions or learn new skills before the typical retirement age of 65.
But before you quit your day job, you should save up a good bit of money. Calculating the likelihood of meeting that objective will help you make a more informed decision about whether or not retiring at 55 is a sensible plan.
A financial planner can give you a more accurate idea of when you could be able to retire.
When I become 55, are I eligible to retire legally?
Nothing in the guide to retirement prohibits you from taking early retirement at the age of 55. Many people in the FIRE (financial independence, retire early) community hope to leave their jobs and pursue early retirement by age 40. In other words, if you’re in your mid-50s and want to retire, you may do so without breaking any rules.
But it’s important to remember that most people don’t retire at age 55. Typically, this means waiting until age 66 or 67 if you plan to collect Social Security benefits upon retirement. And some retirees may decide to stay working far into their later years.
When I am 55, will I be able to retire and claim Social Security?
When it comes to planning for your retirement, payments from Social Security might be crucial. These payments are meant to supplement your current monthly income from sources like 401(k)s, IRAs, taxable investment accounts, annuities, etc.
Do you have to wait until you’re 66 to collect Social Security? The answer, which is unfortunate to hear, is no. If you’re 62 or older, you can start collecting Social Security retirement payments. This comes with a caveat, though. If you begin receiving Social Security payments before you reach full retirement age, your payout will be lower than it would otherwise be.
You may be eligible for a reduction in your benefits if you begin receiving them at age 62 while you are still actively engaged in gainful employment. Imagine you’re 55 and ready to retire from your regular job, but you’d still want to consult on the side. If you work as a consultant after you reach age 62, it may reduce the amount of Social Security retirement compensation you get.
On the other hand, if you wait to collect your Social Security benefits, you may be eligible for a greater payout when you do eventually collect. One might get 132% more in monthly Social Security benefits if they delay to age 70 to begin collecting.
If that’s the case, you may retire at 55. You should be aware of the lack of Social Security as a stream of revenue for a while. Also, you should know that taking the benefits early will result in a smaller payout than waiting until you reach full retirement age.
May I withdraw funds from my 401(k) or IRA upon retirement at age 55?
If you want to retire early but don’t have much money saved, a 401(k) or an IRA can assist. However, there is a catch if you try to withdraw money from such accounts before you turn 59 ½.
First, there is something called the Rule of 55. If you are 55 or older, lose your job, are laid off, or decide to leave your present employer in the same calendar year, you can access your 401(k) or 403(b) without paying the penalty. You still can’t access your 401(k) funds from previous employment without paying the penalty if you do so before turning 59 ½. The only way to avoid this is to combine your retirement accounts, such as a 401(k) or 403(b) before you retire.
Generally speaking, if you have a standard Individual Retirement Account (IRA), you won’t be able to withdraw money from it before you turn 59 ½ without incurring a penalty. However, there are a few exceptions to this rule. Your contributions to a Roth IRA are always accessible without tax or penalty. However, you cannot do that until the account has been active for at least five years. Unless you fall under an exemption, you will have to wait until you reach age 59 ½ to withdraw profits penalty-free.
To supplement these strategies, you’ll need liquid savings and investments. A virtual brokerage account might be the first step. However, note that capital gains tax may be due if you sell assets for a profit. Other financial vehicles, such as savings accounts, money markets, cash value life insurance, or annuities, might complement the earnings from a brokerage account.
When you retire early, an annuity might help you maintain your standard of living. You can make payments to the insurer in the form of premiums if you have this kind of insurance contract. As a result, you might start receiving payments every month at a later date. If you’re concerned about running out of money before you can start withdrawing from retirement funds or receiving Social Security payments, an annuity would be something to think about.
Can I retire at 55, and how much money will I need?
One key difference between planning for retirement at age 55 and 65 or later is the increased financial resources required to support a longer retirement. Your retirement savings need to endure for 25 years if you retire at age 65 and live to be 90. If you want to retire at age 55 rather than 65, your funds will need to provide for you for a total of 35 years. And that’s assuming you never become sick and never need expensive long-term care that may wipe out your savings.
If you want to retire at age 55, how much money would you need? In a nutshell, everything is up to you and how you choose to live your life. Spending less won’t be a problem if you can downsize your lifestyle to the barest essentials. However, suppose you want to retire early, travel, purchase a house, or start a business. In that case, you might require a more significant retirement fund.
When planning for retirement at age 55, it’s essential to think about:
- How much do you now spend every month?
- If you could retire early, how much would you think it would cost?
- Estimated number of years you plan to spend enjoying your retirement.
- How much money you’ll be making before you can start collecting Social Security or withdrawing money from a retirement account without incurring a penalty?
- How much cash have you set aside that isn’t in a retirement account like a 401(k) or an individual retirement account?
- How much time have you left to put money down and make investments before you turn 55?
Answering these questions thoroughly will help you zero down on a target figure. If you’re 55 years old and want to know if you can retire on $500,000 or $1,000,000, that’s an example. Alternately, you may think that $2,000,000 is more accurate.
You can find a solution by applying specific general rules of thumb. By age 55, for instance, the average person is advised to have saved seven times their yearly salary for retirement. Having $100,000 yearly means you’ll need $700,000 in savings by age 55.
However, that isn’t the whole picture. It’s essential to calculate how long your predicted $700,000 retirement budget will run and how much extra money you may be required to save.
Medical insurance and retiring early
When you retire at 55, healthcare costs are an actual outlay that you can’t ignore. While Medicare can help offset some of your retirement healthcare costs, you won’t be able to sign up until the year in which you turn 65. You’ll need to make alternate arrangements for covering medical costs throughout those ten years.
Health insurance choices you may have include:
- COBRA insurance
- Insuring oneself via the Health Insurance Market
- Marital plan enrollment
- Sharing of medical costs
- Skipping out on insurance altogether
Depending on the specifics of your company’s health care plan, COBRA insurance is perhaps the most costly option. Enrolling in your spouse’s plan may be more affordable until you become eligible for Medicare. However, this won’t be an option if you’ve never been married or your partner doesn’t have health insurance.
Long-term care demands are another factor to consider if you plan to retire at age 55. The cost of long-term care can quickly drain a person’s savings by several thousand dollars every year. Although you may be able to receive financial assistance from Medicaid to help cover these expenditures, in most cases, doing so will require you first actually to spend a few of your assets.
You could prevent this situation by establishing a Medicaid asset protection trust. If you need help determining whether or not this is the right move for you, consult with a financial consultant or an attorney experienced in estate planning.
Although retiring at age 55 may seem like a distant dream, it is possible to do so with careful financial planning. If you’re considering retiring early, you should know that doing so might change your savings needs and where you should put them. To that end, think about the role that various investment vehicles and planning tools, such as cash value life insurance and annuities, may play in assisting you in meeting your retirement goals.
Nexym's editorial team handpicks all of the products and services it recommends, regardless of external influences. Affiliate links appear in some of our stories. We may receive an affiliate commission if you purchase something through one of these links, which helps us stay independent and support our great team.