3 Things to Consider Before You Retire at 55

Sure, you can retire at 55, if you've planned for these items.

Illustration of the challenges of retiring at 55 (addressed in article).

Emily Dunphy / The Balance

 

To retire at age 55, there are a few things you'll need to think about that someone who retires later won't. The three most vital factors in early retirement planning are how long you'll need income, healthcare costs, and how you're going to spend your time.

Planning for Income

The average life expectancy is 78 years in the U.S. If you retire at 55, you'll probably need your assets to generate income for at least two decades. If you want to have enough income, you'll need an accurate estimate of how much you plan to spend each year. Then, you'll need to compare that to your current sources of retirement income. To learn how long you may live, the Social Security Administration has a simple calculator to give you a rough estimate.

Social Security benefits won’t start until at least age 62 in most cases. Taking them early means that you'll receive a reduced amount. If you were born in 1960 or later, you won't receive your full Social Security benefits until age 67.

In addition to owing income taxes when you withdraw from a traditional IRA or 401(k), there are typically penalties if the withdrawals begin before age 59 1/2. So, if you do decide to retire at 55, you'll need to have other sources to tap into for a few years. If you make enough, you could set aside some savings to see you through those years. If that's not an option, there are, potentially, other ways to tap into your 401(k) or IRA early and avoid the withdrawal penalty.

You could also use money from a Roth IRA, which doesn't have limits on withdrawals of contributions. (Earnings may still be subject to taxes/penalties if no other exemption applies.)

Another option is to use larger equal periodic payments (Rule 72t) to withdraw money early from a traditional IRA or 401(k). This would allow you to avoid the 10% early-withdrawal tax. With this approach, your life expectancy, based on IRS tables, is used to calculate the amount you would need to withdraw. You would, essentially, receive the same amount each year, and you must receive that amount for five years or until age 59 1/2, whichever is later. Applicable taxes also need to be paid when you withdraw the money.

Calculating these payments can be complex, but your accountant or plan custodian can help you explore this option. In addition, if you have a workplace 401K you may be eligible for an IRS exception to the penalties for early withdrawals referred to as the "Rule of 55." The Rule of 55 may allow you to take penalty-free withdrawals from a 401(k) before age 59 1/2, if you leave your employer for any reason in the year you turn 55 or later. The same loophole does not apply to traditional IRA withdrawals, though.

Paying for Health Care

Medicare coverage doesn't start until age 65. If you want to retire at age 55, you'll need a source of health insurance that will provide for you until you reach age 65.

The Affordable Care Act guarantees access to health insurance, even with pre-existing conditions. You can't be charged a higher rate for any health issues, but premiums are based on age. If you're between the ages of 55 and 65, it can cost as much as $1,000 per month.

If you've had a healthcare plan and have been able to keep it, you might be able to keep your monthly payments down.

Some employers may allow you to keep your health insurance with them, but they might ask you to pay some or all of the premiums they have been paying.

The Kaiser Family Foundation has a calculator to view average healthcare premiums in your state. Depending on your income, you may be able to apply for subsidies. A single 55-year-old with an annual income of $60,000 can purchase a Silver plan through the Marketplace for $360 per month.

Using Your Time

When thinking about early retirement, give a lot of thought to what you want to do with your time and money. If you have expensive hobbies, think about those extra costs when planning. If you want to travel, decide whether to maintain a home or choose to rent, so you won't be tied down.

If you've always wanted to start a business, retirement could be a good time to start. The Kauffman Indicators of Entrepreneurship stated in 2020 that those aged 55 through 64 had the second-highest startup rate (tied with those aged 35 through 44). You could use your prior experiences to start a consulting business or turn a hobby into a job.

If you don't want to work, volunteering is a way many retirees stay busy. You might have other commitments, such as caring for family members. No matter how you plan to spend your time, proper planning can make retiring at age 55 a reality.

Frequently Asked Questions (FAQs)

How much money do you need to retire?

The amount of money you need in order to retire depends on your sources of retirement income and your planned retirement spending. Some experts say that you should have enough saved to have about 80% of your pre-retirement salary available annually. Social Security and pensions will help, but you'll likely need to set aside additional funds so you'll have enough money for the duration of your retirement.

What is the rule of 55?

There's usually a 10% penalty for withdrawing funds from your 401(k) before age 59 1/2. There is an exception, though, if you're age 55 or older. You can receive distributions from your 401(k) if you're separated from your employer if it happened during or after the year you turn 55. A separation can include being laid off, fired, or quitting.