Have you ever wondered what it would be like to retire young and spend your days as you please? You’re not alone. Recent increases in retirement savings account contributions have made Americans think twice about early retirement as a viable option for their future. It’s one thing to daydream about early retirement but another to seriously consider how to retire early.
Retiring at 55 takes thoughtful planning. 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.
How Much Do You Need to Save to Retire at 55?
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 preretirement 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.
3 Ways on How to Retire at 55
1. 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 |
Check out these Benzinga articles to learn more about mutual funds, target date retirement funds and other investments that are ideal for retirees and can help you fund those extra years of early retirement.
2. Adjust Your Budget
If you want to retire early, you have to budget and plan ahead. If you’re not sure where to begin, Benzinga’s booklist of the best retirement planning books is a great place to start.
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 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. If you aren’t, you can use tracking apps to make adjustments right away to get you back on schedule.
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.
Things to Consider When Retiring at 55
Cost of Living
Cost of living impacts the longevity of your retirement savings and varies from state to state. A comfortable nest egg in one city may not be passable in another. Cost of living expenses include necessities such as food, housing, clothing, transportation, utilities healthcare and communications. It also includes 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. If you are considering moving after you retire, research cities or states that have lower cost of living so you can get the most out of your retirement 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.
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.
Healthcare
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 2 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.
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. Retiring at 55 allows individuals to have more flexibility and freedom in their schedule while continuing to pursue their passions or contribute to the workforce in a less demanding capacity. However, it is important to carefully plan and ensure that financial obligations and retirement savings are sufficient to support this decision.
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.
How much money does it take to retire at 55?
The amount of money needed to retire at 55 depends on various factors such as savings, lifestyle choices, expenses, and investment returns. It is recommended to seek guidance from a financial advisor to create a personalized retirement plan.