Three 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 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 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 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.

There are also fines and rules if you withdraw early 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 for a few years. If you make enough, you could set aside some savings to see you through those years.

You could also use money from a Roth IRA, which doesn't have limits on withdrawals.

Another option is to use larger equal periodic payments 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, 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. Applicable taxes also need to be paid when you withdraw money.

Calculating these payments can be complex, 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 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 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 health care 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.