Retiring at 55 can be fulfilling, as you’ll have more years of financial independence and freedom than most people. Plus, your health may be better today than it will be in 10 years, and you might have the energy to enjoy the things you’re looking forward to most.
If you’re hoping to retire around age 55, there are two crucial aspects to explore:
- What do I need to consider if I’m retiring early? What about health care, taxes, etc.?
- Do I have the financial resources—income and assets—to retire by 55?
Anecdotally, I’ve worked with clients who retired early, and they tend to be people who spend relatively little or who have (for whatever reason) been able to accumulate significant assets.
Most people retire around age 62, and most retirement advice is geared toward those who retire well after age 55. As a result, you need to be especially careful about typical rules and strategies—because they might not apply to you.
Continue reading below, or watch this video with similar information:
Let’s start with health care. Through your working years, you probably got health coverage through an employer. You may have used affordable care under a group plan, but now you’re on your own.
Unfortunately, health insurance can be expensive when you pay full price for an individual or family plan. But you might not need to pay full price. And once you reach age 65 or qualify for Medicare, you might see your costs fall.
Start by understanding typical costs for coverage. To do so, visit your state’s Marketplace or Exchange, which you can access through Healthcare.gov. You can also play with calculators like Fidelity’s health cost estimator. But don’t panic when you first see the numbers. Again, you might be able to pay substantially less, depending on your situation.
You might have several options when it comes to coverage, including:
- Buy your own coverage through a Marketplace, Exchange, or insurer.
- Continue coverage for up to 18 months (for most people) via COBRA or your state’s continuation program.
- Switch to a spouse’s plan, if available.
Continuing coverage from your job will likely be expensive, but it could be worthwhile. But that’s a temporary measure, and eventually, you’ll switch to something else.
For most people, a Marketplace or Exchange plan is the next step. With that approach, you choose a plan based on things like:
- Medical providers
- And more
You typically pay a monthly premium, and higher premiums typically offer better coverage.
Can You Pay Less?
As you explore pricing for individual or family policies, check to see if you qualify for ACA tax credits. You might end up paying substantially less than the standard monthly premium.
If your income is low enough, you could qualify for a significant cost reduction after subsidies. Given that you’re planning to retire at 55, your income should be relatively low at that point. Your only income might be earnings from taxable accounts, and you might have income from retirement account withdrawals (while being mindful of taxes) or Roth conversions.
To find out how much you might pay, be sure to enter your income in your state’s calculators. If you’re not finding helpful information, you can get some general numbers with this tool.
Note that you might have conflicting goals here. On the one hand, keeping your income low is helpful so you pay as little as possible for health coverage. On the other hand, it could make sense to take income strategically (by converting pre-tax assets to Roth, for example). But with careful analysis, you may be able to find a nice balance.
Once you’re 65, things typically change, as you qualify for Medicare. You can learn more about typical health care costs before and after age 65 in this article.
Taxes at Age 55
Retirement accounts typically require you to reach age 59.5 before you can take penalty-free withdrawals. But what if you retire at 55 and want to access your money?
You can always spend from taxable accounts, such as individual and joint brokerage accounts. When you sell assets, you may realize capital gains and owe taxes, but the tax burden is often manageable.
That said, you might want or need to spend from retirement accounts, as well. That’s especially true when you don’t have sufficient assets in taxable accounts or when you want to pursue tax strategies.
There are several ways to spend money from retirement accounts before you reach age 59.5, including:
- Roth IRA withdrawals
- “Rule of 55”
- SEPP or 72(t)
- 457 plans
But before we dive into those strategies, it’s time for a friendly reminder: Speak with a CPA to discuss your situation in detail before making any decisions. This information is only general education, and is no substitute for individual advice. It cannot be used to avoid tax penalties.
Roth IRAs generally allow you to withdraw your regular contributions at any time with no taxes or penalties. Regular contributions include those annual additions you make up to the maximum limit, such as when you add $7,000 per year. Fortunately, IRS rules say that your regular contributions come out first (with tax-free treatment), while earnings and other money types come out later.
Money that you convert to Roth is treated differently. Those dollars could also be helpful, but it’s critical to review tax rules and timing before making any decisions.
That said, you might not want to wipe out your Roth savings, and it could make sense to use up pre-tax savings instead. You might even want to add to Roth-type accounts by making Roth conversions.
Rule of 55
If you leave your job at age 55 or later and have assets in that employer’s 401(k), it could be possible to spend that money without an early-withdrawal penalty. IRS rules may allow you to skip the 10% penalty on distributions if you meet specific criteria.
For public safety workers, you can start as early as age 50.
This is critical to know because you might think you should always roll your 401(k) to an IRA after you stop working. But if you meet the criteria, your 401(k) could be an excellent place to draw income from.
While the money might create taxable income, that’s not necessarily bad. You can manage your income and keep it low enough to pay at relatively low rates. Some employers limit how you take withdrawals, though, so check with your plan administrator to understand your options.
Early Withdrawals via SEPP or 72(t)
Another option is to pull funds from pre-tax accounts under a series of substantially equal periodic payments (SEPP). That strategy can be rigid and challenging to navigate, but it might be your best option. But keep in mind: You need to follow through for the longer of five years or age 59.5 without making significant changes. If you stumble, the IRS may retroactively charge tax penalties.
Some government employees have access to 457(b) plans in addition to 401(k) or 403(b) plans. Those programs allow you to save more each year, and they come with a side bonus—there’s no 10% early distribution penalty on withdrawals.
Shouldn’t You Minimize Taxes?
It may be tempting to avoid paying taxes until you’re forced to. While that makes sense intuitively, the best strategy could involve paying taxes before necessary. With that approach, you might be able to reduce your lifetime tax burden and pay at the lowest rates available to you.
Remember that you must take required minimum distributions (RMDs) from certain pre-tax accounts after age 72 as of this writing. When that happens, your taxable income might jump, putting you into the highest tax brackets. At the same time, you might trigger higher Medicare premiums, Social Security taxation, and other complications.
But if you start drawing down pre-tax accounts early (with a well-thought-out plan), it may be possible to smooth out your income. As a result, the impact of RMDs could be smaller.
Do You Have Enough?
Your ability to retire at 55 depends on how much income and assets you have relative to your spending. With sufficient resources, you can retire comfortably, but it’s wise to run the numbers and explore what-if scenarios.
Income from Social Security or pensions can form a foundation for your retirement income. But at 55, you might not be eligible for payments yet. As a result, you’ll typically draw from savings and investments until your income payments begin.
During the early years of retirement, you might draw from your assets at a relatively high rate. That can be scary, but it’s not necessarily a bad idea (although things can go badly, and you might run out of money). In fact, spending down assets could help you maximize your retirement benefits while reducing future RMDs and tax issues.
Once your income payments start, you might not get enough to live on. So, your assets will continue to provide income, but you can withdraw at a relatively low rate. The higher your income, the less you withdraw. Anything you can do to increase your Social Security or pension income will likely be helpful.
Most people spend from their assets to supplement retirement income. And when you retire at 55, you’ll probably live off your assets for at least ten years or so.
So, do you have enough saved?
The only way to know the answer is to run some numbers. In particular, you need to look at:
- How much you spend
- What taxes you’ll owe on withdrawals
- Your current assets
- Estimated growth or investment returns
- Surprises and healthcare events
- And more
There are various ways to arrive at the answer, and calculators are a common tool for this type of work.
I do all of the above for clients, and you can view some pricing options if you want help. But you can also DIY, if you prefer.
There are plenty of online calculators out there to help you run your own numbers. They range from simple to complicated, and no calculator is perfect. The trick is to find tools that accommodate early retirement—and that don’t assume you start Social Security immediately at retirement. This free early retirement calculator is a simplified way to look at some numbers.
Can I retire at 55 with $1 million?
It may be possible to retire comfortably. Assuming a withdrawal rate of 3% to 4%, your savings might generate $30,000 to $40,000 of inflation-adjusted income. Add Social Security or a pension to that amount to figure out if it’s enough. For instance, $30,000 per year of Social Security plus $30,000 of investment withdrawals would provide $60,000 of pre-tax income. Taxes on that income might amount to roughly $3,300 for a single filer (less for a married couple filing jointly).
But the trick is to figure out how much you’re withdrawing between when you stop working and when you begin Social Security. Will 3% to 4% be enough? If not, you’ll withdraw at a higher rate. And if the markets don’t cooperate (and replenish your savings), you could run low on funds. Eventually, you could run out of money if things go badly.
What about Social Security benefits?
Your retirement benefit is based on your highest earning years, and up to 35 years of income go into the calculation. If you retire early, your Social Security benefit could be lower than you expect. Social Security statements and estimates often assume that you’ll continue working and earning a similar income into your 60s. But you can use a calculator at SSA.gov to find out what happens if you stop working earlier.
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