If you want to retire at age 55, there are a few considerations you'll need to make that won't be necessary for someone who retires later. When it comes to planning for early retirement, the three most important considerations are the length of time you'll require an income, the costs associated with maintaining your health, and the activities you have planned for your free time.
Making a Plan for Revenue
In the year 2020, the average life expectancy in the United States was 77 years. If you plan to retire at the age of 55, you should anticipate that you will require an income from your assets for at least 20 years. You will need an accurate estimate of how much money you intend to spend each year in order to achieve your goal of having sufficient income. The next step is to evaluate these findings in light of the retirement income sources you currently have. The Social Security Administration provides a straightforward calculator that can provide you with an approximate prediction of how long you will live. In most cases, you can begin receiving Social Security benefits at the age of 62; however, the amount you receive will be reduced until you reach the full retirement age. People who were born in 1960 or later won't be eligible for their full Social Security benefits until they reach the age of 67. When you take money out of a traditional IRA or 401(k), you will owe income taxes. However, if you take money out of those accounts before you turn 59 and a half, you will also be subject to penalties. If you do choose to retire at the age of 55, you will need to ensure that you have access to other sources of income for at least the next few years. If your income is high enough, you might be able to put some money away each month to see you through those years. If that is not a possibility for you, there are potentially other ways to access your 401(k) or IRA ahead of schedule while avoiding the penalty for early withdrawal. Note: You could also use money from a Roth IRA, which does not place any restrictions on the amount of money that can be taken out of the account. (Even if you qualify for one exemption or another, your earnings could still be subject to taxes or other penalties.) Making early withdrawals from a traditional Individual Retirement Account (IRA) or 401(k) using substantially equal periodic payments (Rule 72(t)) is another possibility (k). You would be exempt from the early withdrawal tax, which is currently 10% if you did this. In this method, the amount of money you would need to withdraw from your retirement account is determined by using the IRS tables to reference your life expectancy. You would, for all intents and purposes, receive the same amount each year, and you would be required to receive that amount for either five years or until you reached the age of 59 and a half, whichever came first. When you withdraw the money, you are also responsible for paying any taxes that are due. The calculation of these payments can be difficult, but the plan custodian or your accountant can assist you in investigating this possibility. In addition, if you have a 401K through your place of employment, you may be eligible for a deduction from the early withdrawal penalties imposed by the IRS. This deduction is known as the "Rule of 55." If you leave your employer for any reason in the year that you turn 55 or later, you may be able to make penalty-free withdrawals from your 401(k) prior to the age of 59 1/2. This is because the Rule of 55 allows you to do so. Withdrawals made from traditional IRAs, on the other hand, are not subject to the same loophole.The Cost of Health Insurance and Care
Medicare coverage doesn't start until age 65. If you want to retire at the age of 55, you'll need to find a source of health insurance that will cover you until you reach the age of 65 and provide for you during that time. Access to health insurance is ensured by the Affordability Care Act, even for people who already have preexisting conditions. A higher premium cannot be assessed for you because of any preexisting health conditions; however, premiums are calculated according to age. In 2021, people between the ages of 55 and 64 who were covered by the Affordable Care Act had to pay a monthly premium that averaged $771. It's possible that you'll be able to reduce your monthly payments if you've been able to keep your health insurance plan for an extended period of time. Note: It's possible that some employers will let you keep your health insurance plan with them, but they may require you to pay some or all of the premiums that they've been covering up until now. There is a calculator available on the website of the Kaiser Family Foundation that will show you the typical cost of health insurance in your state. You might be eligible to apply for subsidies if your income falls within a certain range. In 2022, a person who is 55 years old and single and has an annual income of $60,000 is eligible to pay $425 per month to purchase a Silver plan through the Marketplace.Using Your Time
When contemplating early retirement, you should give considerable thought to how you would like to spend both your time and your money once you no longer have to work. When making plans, you should factor in the additional costs associated with expensive hobbies. If you want to be free to go places, you need to decide whether you want to own a home or rent one so that you won't be tied down. If you've spent your whole life dreaming about launching your own company, retirement might be the perfect opportunity to do so. According to the Kauffman Indicators of Entrepreneurship in the year 2020, the age group of 55 to 64-year-olds had the second-highest startup rate (tied with those aged 35 through 44). You could start a consulting business based on your previous experiences, or you could convert a hobby into a full-time occupation. Many retirees choose to stay active by taking on volunteer work because they do not wish to continue working. You might have additional responsibilities, such as taking care of members of your family. With the right preparation, retiring at age 55 is a possibility regardless of how you intend to spend your time in retirement.Questions That Are Typically Asked (FAQs)
How much money do you need to have saved up before you can retire?
The sum of money you'll need to retire comfortably is contingent on the types of retirement income you anticipate receiving as well as the retirement expenses you intend to incur. According to the recommendations of some financial advisors, you should aim to have enough money saved up so that you can access approximately 80 percent of your annual salary before you retire. Although pensions and Social Security will be of assistance, it is highly likely that you will need to put aside additional funds in order to ensure that you have enough money to last throughout your retirement.What exactly is the 55-year Rule?
If you withdraw money from your 401(k) before you reach the age and a half, there is typically a penalty of 10 percent. However, if you are at least 55 years old, you qualify for the exemption. If you are laid off from your job during or after the year in which you turn 55, you are eligible to receive distributions from your 401(k), regardless of when the separation occurred.