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 55, there are a few things you'll need to consider that someone who retires later won't have to think about. The three most important factors in early retirement planning are longevity, health care costs, and time.

Planning for Longevity

Assuming an average life expectancy, if you retire at 55 you'll need your assets to produce income for at least a few decades. To be financially comfortable, develop an accurate projection of what you plan to spend each year and compare that to sources of retirement income. To learn your potential life expectancy, the Social Security Administration has a simple calculator that can give you a rough estimate.

Social Security won’t start until age 62 in most cases, and taking Social Security benefits early means a reduced benefit. If you were born in 1960 or later, you won't receive your full Social Security benefits until age 67.

There are also penalties and restrictions on accessing retirement account money from a traditional IRA or 401(k) before age 59 1/2. If you retire at 55, you'll need to have other sources to tap into, at least for a few years. You could set aside supplemental savings to see you through those years or use money from a Roth IRA, which doesn't have withdrawal restrictions.

Another option to consider is using substantially equal periodic payments to withdraw money from a traditional IRA or 401(k) early, which allows you to avoid the early withdrawal penalty tax of 10%. With this approach, the amount in your IRA is divided by the number of years you're expected to live. You receive the same amount each year, and you must receive that amount for five years or until age 59 1/2, whichever is later. Taxes also need to be paid on withdrawals. Calculating these payments can be complicated, but your accountant or plan custodian can help you explore this option.

Paying for Health Care

Medicare coverage doesn't start until age 65. If you're planning to retire at 55, you'll need a source of health insurance coverage that will provide for you until you become eligible for Medicare. With some employers, you may be able to continue your health insurance coverage, but you may need to pay some or all of the premiums your employer was paying.

The Affordable Care Act guarantees access to health insurance regardless of pre-existing conditions. You can't be charged a higher rate for any health conditions, but premiums are based on age. Coverage between the ages of 55 and 65 can be expensive, costing $1,000 per month or more depending on the type of plan you choose and where you live. The Kaiser Family Foundation has a calculator to view average health insurance premiums in your state. Depending on your income, you may be eligible for subsidies.

According to the Kaiser Family Foundation, the average cost of a silver (mid-level) plan for a 55-year-old purchased through the Marketplace is $804 per month.

Using Your Time

When thinking about early retirement, give careful thought to what you want to do with your time and money. For example, if you have expensive hobbies, consider those extra costs when determining how much money is needed for many years of retirement. If you're going to travel, consider whether to maintain a permanent residence or opt for renting so there's more flexibility.

If you've always wanted to start a business, retirement could be a good time to start. According to the Kauffman Indicators of Entrepreneurship, in 2019 those aged 55-64 had the second-highest rate of new entrepreneurship. You could use prior experiences to start a consulting business or turn a hobby into a money-making activity.

If you don't want to work, volunteering is meaningful for many retirees. Or you may have other commitments like caring for family members. Regardless of how you plan to spend your time, with proper planning, retiring at 55 can be a reality.

Article Sources

  1. Social Security Administration. "Retirement Benefits," Page 3. Accessed Sept. 12, 2020.

  2. IRS. "Retirement Plans FAQs Regarding Substantially Equal Periodic Payments." Accessed Sept. 12, 2020.

  3. Kaiser Family Foundation. "Health Insurance Marketplace Calculator." Accessed Sept. 12, 2020.

  4. Kauffman Indicators of Entrepreneurship. "2019 Early-Stage Entrepreneurship in the United States," Page 14. Accessed Sept. 12, 2020.