Dreaming of retiring early at 55? Discover practical tips and strategies to achieve financial independence and retire comfortably at a younger age.
Many Americans have a dream of retiring at the young age of 55. With longer life expectancies and a desire for financial independence, more and more people are looking for ways to retire early and enjoy their golden years without the stress of work.
Can you actually retire at 55? Yes, retiring at 55 is not against any retirement rules or laws. Some individuals even aim to retire as early as 40. Whether or not you can actually retire at 55 depends on a variety of factors including your savings, investments, lifestyle and retirement goals. More importantly, planning for retirement requires careful financial considerations, disciplined saving and smart investment decisions. You’ll need to balance putting away more money in less time and have a solid investment portfolio that allows for a good quality of living. Despite the challenges, it is possible to set yourself up for a comfortable, early retirement. Read on to discover ways and strategies you can do to retire early and live the life you have always dreamed of.
How Do I Retire at 55? Effective Tips for Early Retirement
Here are some tips and guidelines to help you retire at 55 and enjoy a fulfilling and financially secure retirement.
1. Adjust Your Budget
If you want to retire early, you have to budget and plan ahead. Here's a simple guide to help you when setting a retirement budget:
- Consider the lifestyle you want when you retire and how expensive it will be. The more lavish the lifestyle, the more you need to save.
- Set a goal for how much you need to save. Your goal is going to depend largely on what lifestyle you imagine when you retire.
- Streamline expenses. Keep track of your expenses using a spreadsheet or with spending tracker apps to help you identify and eliminate unnecessary expenditures. You can put that extra money toward your retirement savings.
- Monitor and readjust. Retirement tracking apps are a great tool for making sure your investments and savings are on track to meet your retirement goals. You can use these apps to make adjustments right away and get you back on schedule.
As you begin your budget planning for your early retirement goals, make sure to consider these factors:
Cost of Living
The cost of living varies from state to state and can impact the longevity of retirement savings. It includes necessities such as food, housing, clothing, transportation, utilities and healthcare, and non-necessities such as social activities and vacations. Keeping a detailed budget can help you identify your cost of living expenses and make an accurate retirement savings plan. Consider moving to a city with a lower cost of living to make the most out of your savings.
Life Pursuits
When you retire at 55, you have quite a lot of life to live. As a result, you should consider what you want to do, businesses you want to start, jobs you may want to have, places you might like to travel, locations where you might want to live, etc. Life pursuits are a big part of retirement because people get bored or what to make a change when they find themselves waking up retired with not much to do.
Healthcare Cost
Healthcare is one of the biggest expenses you’re likely to encounter during early retirement and probably the most shocking. If your healthcare has been covered through your employer, then you’ve been paying around 25% to insure yourself while your employer has been subsidizing the remaining 75%. If you retire at 55, you have 10 years before you are eligible for government assistance via Medicare, leaving you with two choices. Either you pay 100% of your private health insurance for a decade or you take a major risk and go uninsured until 65.
If you choose the private insurance route, the Affordable Care Act guarantees that you are able to secure health insurance regardless of a preexisting condition. However, coverage between ages 55–65 can be expensive, with some premiums exceeding $1,000 per month depending on the plan you choose.
Your best bet is to either plan for covering the costs or find part-time work that provides health insurance to help ease the burden of healthcare costs until you are eligible for Medicare.
2. Boost Your Investment Savings
No matter where you are on your path to retirement, you want to make sure that you are getting the most out of your retirement investments. Following a consistent investment strategy appropriate to your age and income level while maintaining a retirement portfolio with multiple tax-advantaged accounts, like a 401(k) or a traditional IRA and tax-free accounts (like a Roth IRA) can help maximize your savings.
Your investing approach is going to change depending on your age and income level. As a rule, younger investors should pursue a higher risk strategy while older investors closer to retirement should take a more conservative approach. If you’re planning on retiring at 55 and relying on your investments to carry you through an additional decade of retirement, you might have to follow a more aggressive strategy for a longer period.
| Investment Approaches for Retirement | Younger Investors | Older Investors |
|---|---|---|
| Investment Strategy | Aggressive | Conservative |
| Risk | High | Low |
| Returns | High | Moderate |
Keep in mind that there are strict rules that come with accessing funds from your retirement savings accounts:
The Rule of 55
The Rule of 55 states that if you leave your job in the year you turn 55 or older, you can withdraw money from your 401(k) or 403(b) without incurring the usual 10% early withdrawal penalty. This is a great way to access your retirement savings before you reach the typical retirement age of 59 1/2 without facing steep penalties. However, it’s important to note that while you can avoid the penalty for early withdrawal, you will still have to pay income taxes on the money you take out.
Taxes
Unfortunately, taxes don’t disappear when you retire. If you’ve invested in tax-deferred accounts like a 401(k) or a traditional IRA, your savings have been growing tax-free until now. After you retire, your withdrawals are subject to income tax. Furthermore, if you withdraw from these accounts before age 59 ½, then you will have to pay an additional penalty for early withdrawal (around 10%). If you retire at 55, then you have 4 ½ years before you can access your retirement account funds without the extra penalty. This can be limiting if you need to dip into your retirement savings for a major emergency.
One way to cover yourself for those 4 ½ years is by having a Roth IRA in your retirement portfolio. A Roth IRA is different from a traditional IRA because you contribute to it after you pay taxes. This means that you don’t have to pay taxes when you withdraw because you have already paid them. Additionally, there is no age limit for a Roth IRA withdrawal, meaning you can access those funds whenever you need without paying an additional penalty.
Having a mix of retirement accounts can help ease the tax burden of retirement and ensure that you’re not left strapped for cash if you retire early.
You may also consider moving to a state that does not tax retirement income to maximize your savings.
3. Find a Financial Advisor
If you want to start planning for retirement but aren’t sure where to begin, reach out to a financial advisor for help. In addition to offering holistic financial advice, financial advisors can offer specialized advice on how to plan and prepare for retirement. Make sure you know what your retirement goals are before meeting with an advisor so that he or she can analyze your economic situation and help you come up with a manageable plan to achieve your goals.
How Much Money Do You Need to Retire at Age 55?
How much. do you need to retire? According to the Federal Reserve’s 2022 Survey of Consumer Finances, the average retirement savings for the 55-64 age bracket is $537,560. Generally, experts suggest that you put between 10%-15% of your annual income into retirement savings. If you want to retire at 55, that amount won’t suffice. You’re going to need enough money to maintain your lifestyle and expenses for about 4 decades. You also will have 10 less years to save and grow your retirement savings. To compensate for fewer working years, plan on increasing your annual retirement savings closer to 25%–35% of your income.
A general rule is that you need to replace around 70%–80% of your pre-retirement income to maintain a similar standard of living when you retire. Some of that income will come from Social Security but you will need to supplement the rest with other income sources.
Factors affecting how much income you need to supplement:
- Your current income
- How much you have already saved
- Your age
- Your projected Social Security income
- Your anticipated annual expenses when you retire
One advantage about retiring at 55 is that you will probably need less income because you are no longer putting away large amounts of money for retirement. Additionally, if you are maxing out your pretax retirement savings contribution limits, your income taxes will be lower leading up to retirement.
Plan Now for Ease Later
Retiring at 55 is challenging but not impossible. It takes serious planning. By using strategies to maximize savings and budget wisely, you can put away a sizable chunk of your income and savings toward retirement. If you anticipate healthcare and lifestyle costs, taxes on pretax IRAs or penalties for early savings withdrawals, you can avoid major pitfalls of early retirement.
Consider talking to a financial planner about your retirement goals to help you determine what you need to do to reach your retirement goals. The sooner you put your plan into action the sooner you dream of early retirement becomes a reality.
Frequently Asked Questions
Can you retire at 55 and still work?
Yes, it is possible to retire at 55 and still continue to work. Many people choose to retire early and pursue part-time or freelance work to stay engaged and supplement their income gap.
What is the earliest age to retire?
In the United States, the earliest retirement age is typically 62, when individuals become eligible for Social Security retirement benefits. However, retiring at this age may result in a reduced monthly benefit amount compared to retiring at full retirement age, which is typically around 66-67 depending on the year of birth. It’s important to consider factors such as financial stability, healthcare coverage and personal goals before making the decision to retire at any age.
Can I retire at 55 and collect Social Security?
You can start collecting Social Security benefits at age 62, but your benefits will be reduced compared to if you wait until your full retirement age, which is around 66-67 depending on your birth year. If you retire at 55, you may not have enough work credits to qualify for Social Security benefits unless you have worked for at least 10 years. It’s important to consider your individual financial situation and speak with a financial advisor to assess the best retirement age for you.