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Retirement

Can You Retire at The Age of 55?

The traditional retirement age is 65. That’s when Social Security benefits kick in, and you’re well-past the age to take penalty-free withdrawals from your 401k (59½). But some people don’t want to wait that long. The question then becomes, can you retire at the age of 55 — a full decade sooner than expected?

The answer is yes, and many people successfully do this each year. You have the power to retire whenever you want! The trick is doing it in a way that allows you to financially support yourself. With early withdrawal penalties and deferred Social Security benefits to worry about, retiring at 55 isn’t an easy endeavor. But, with a little planning and a lot of foresight, it’s possible. 

Here’s a look at some of the most common strategies for retiring at 55. Make sure you’re covering these bases (at a minimum) if you’re planning to leave the workforce a full decade early. 

Can you retire at the age of 55

Can You Retire at the Age of 55? Age Thresholds For Retirement Accounts

When you decide to retire, it means no longer earning an active income. You’ll need to have funds coming in from somewhere to sustain your lifestyle! This isn’t a temporary problem, either. You’ll have to wait anywhere from a few years to a decade before you can start dipping into qualified retirement accounts. Here’s a look at the thresholds for different retirement vehicles:

  • Roth and Regular IRAs: As qualified retirement accounts, you’re unable to tap into the funds you’ve saved until age 59½. This applies to both Traditional and Roth IRAs. It’s also important to note that once you reach age 70½, you’re required to take minimum distributions from these accounts.
  • 401(k) and 403(b): Just like IRAs, employer-sponsored retirement plans are also qualified accounts. This means you’re barred from those funds until age 59½. Again, you’ll also face required minimum distributions (RMD) starting at age 70½.
  • Social Security: There’s a reason the average retirement age is 65. This is when you become eligible for Social Security benefits and can begin collecting monthly income through the program. The amount you earn depends on what you’ve paid into the program through your working years.

What happens if you take from these accounts early? Expect to pay a massive penalty of 10%! This is crushing to retirement accounts, and will make it nearly impossible to reach your long-term retirement goals. You need to figure out an alternative way of obtaining income—whether it’s from a non-qualified account or through a strategy like Substantially Equal Periodic Payments (SEPP)

Calculate Your Cost of Living And Lifestyle

As you’re figuring out how to attain much-needed income until your retirement accounts become available, also think about lifestyle. How much do you need each year to maintain the retirement lifestyle you want? And, what’s your minimal cost of living?

Figuring out how much you need will put early retirement into perspective. There’s a big difference between sustaining an $80,000/year lifestyle from ages 65-85 and sustaining that same lifestyle from ages 55-85. An extra $800,000, to be exact! The best thing you can do to prepare for retirement a decade early is to make sure you can sustain your lifestyle for those extra 10 years with no additional income. 

Make Sure You Find Health Insurance

The cost of healthcare in the United States isn’t cheap. Most people have health insurance through their employer. Retiring early means giving this safety net up and assuming the cost burden yourself. There are private insurance markets, but they’re often costly. Paying out of pocket is an expense you’ll need to factor into an early retirement plan. 

Like Social Security, Medicare eligibility starts at age 65. That means you’ll need healthcare for a decade if you retire at 55. If you have a spouse who’s still working, great! If not, consider your medical needs and the cost of applicable plans. Keep in mind that health can begin to deteriorate in new and unexpected ways as you approach 60. Early retirement is only worth it if you have healthcare coverage that protects you in the event of an unexpected health situation and the costs that come with it. 

Run a Monte Carlo Simulation

Monte Carlo simulations are a popular test simulation for retirement planning. It involves using actuarial insights to extrapolate your financial data through your expected end of life. By adjusting variables like age, portfolio worth, inflation, annual withdrawals and more, the simulation can predict your retirement balances. Consider it a stress test for early retirement planning. If the simulation shows you running out of money before your expected end of life, it might be time to revise your retirement time horizon. 

Early Retirement Requires More Planning

Can you retire at the age of 55? Sure! Retiring a full decade before the traditional age of 65 gives you 10 extra years to live life how you want. Just remember that it also means 10 more years of budgeting income in retirement. If your retirement plan is set up for retirement at 65, you could end up far short of the funds you need to live out the rest of your life comfortably. 

That;s why it’s so important to build passive income as early as possible. To learn more, sign up for the Wealthy Retirement e-letter below.

You may also want to work with a Certified Financial Planner who’s also a Fiduciary. Work with them as early as possible in your early retirement timeline, so they can help you take appropriate long-term action. From helping you coordinate 10 years of penalty-free withdrawals to running Monte Carlo simulations to protect you from risk, a professional is a wise investment. It’ll be well-worth it when you retire comfortably at 55.


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