Retiring at 55 sounds like a dream to many, but reaching a goal like that requires some extra planning ahead of time. While the normal retirement age for most is usually 65 or older, early retirement could give you more time to do things you enjoy and explore new interests. Retiring early is a goal for many people, offering visions of travel, hobbies or simply more free time. This is why age 55 often emerges as a target milestone for leaving the workforce behind. Achieving this goal requires significant foresight, financial discipline and a clear understanding of the rules governing retirement income and benefits.
If you have questions about when you can retire and how to pull it off, consider speaking with a financial advisor.
Can I Actually Retire at 55?
Retiring at age 55 is possible for individuals who plan diligently. Success hinges on factors like accumulating substantial savings, managing investments effectively and defining a realistic retirement lifestyle. Starting to save early and maintaining a high savings rate significantly increases the chances of reaching financial independence by 55.
However, it’s important to keep in mind that retiring at 55 isn’t the norm for most people. One major consideration for early retirement is longevity. Retiring at 55 means potentially funding 30, 40 or even more years of living expenses without employment income. This extended timeframe requires a larger nest egg compared to someone retiring at a more traditional age, like 65 or 67.
Answering the question on whether you can retire at 55 depends on your unique situation. This is why you may want to talk it out with a financial advisor.
Can I Retire at 55 and Collect Social Security?
Social Security retirement benefits can be an important part of your financial puzzle. These benefits are designed to provide monthly income in addition to any income you have from qualified retirement accounts, taxable investment accounts, annuities or other sources. However, you unfortunately cannot begin receiving Social Security retirement benefits at 55.
Retirement income at 55 typically relies heavily on personal savings and investments. Unlike later retirement, Social Security is not yet available. Some early retirees might supplement their savings with income from a pension, part-time work, rental properties or other sources planned well in advance.
The earliest age you can begin drawing Social Security retirement benefits is 62. But there’s a catch – taking Social Security benefits before reaching your full retirement age results in a reduction of your benefit amount.
Your benefits can also be reduced if you start taking them at age 62 but are still working in some capacity. Say you retire at 55 from your full-time job, but you want to do some consulting work on the side. Once you turn 62, you could claim Social Security retirement benefits, but your earnings from consulting work could affect how much you collect.
The flip side to Social Security is that you can be rewarded with a larger benefit amount by waiting to claim it. If you wait until age 70 to take Social Security, for example, you can receive a monthly payment that’s equal to 132% of your regular benefit amount.
Can I Retire at 55 and Take Money From My 401(k) or IRA?
Saving money in a 401(k) or individual retirement account (IRA) can help to fund your early retirement goals. But you may run into a snag when trying to take money from those accounts before age 59.5.
First, there’s the Rule of 55. This IRS rule says that if you get fired, laid off or quit your job in the year that you turn 55, you can withdraw money from your current 401(k) or 403(b) without a penalty. But you still wouldn’t be able to tap any money in 401(k) plans you had at former employers without a penalty before age 59.5. The only way to work around this would be rolling your old 401(k) or 403(b) into your current one before you retire.
If you have a traditional IRA, you generally can’t take money out of it before age 59.5 without a penalty unless you qualify for certain exceptions. With a Roth IRA, you can always withdraw your original contributions tax- and penalty-free. But to do that, the account must have been open for at least five years beforehand. Otherwise, you’ll need to wait until age 59.5 to withdraw earnings without a penalty unless you qualify for an exception.
This means you’ll need to have savings and investments outside of these plans that you can tap. An online brokerage account could be a good place to start. But remember that selling investments at a profit can trigger capital gains tax. You could also supplement a brokerage account with regular savings accounts, money market accounts, cash value life insurance or an annuity.
Annuities can provide a steady stream of income in early retirement. This type of insurance contract allows you to pay a premium to the insurer. This allows you to collect regular monthly payments later beginning at a date you choose. An annuity is something you might consider if you want a backup source of income until you’re eligible to withdraw money from qualified accounts or claim Social Security benefits.
How Much Money Do I Need to Retire at 55?
Planning to retire at 55 is different from planning to retire at 65 or older. This is true for one very important reason: You’ll need more money to last you through your old age. If you were to retire at 65 and live to age 90, your money would need to last 25 years. However, if you’re retiring at age 55 instead, your savings now need to be able to stretch for 35 years. And that assumes you stay healthy and don’t require long-term care at some point, which could significantly drain your assets.
So, how much money do you need to retire at 55? The short answer is that it depends on the type of lifestyle you want to have. If you plan to scale back and live a very minimalist lifestyle that allows you to keep expenses low, then you may be fine with less money. On the other hand, you may need a larger nest egg if your early retirement plans include traveling, buying a home or starting a business.
When preparing a budget to retire at 55, consider:
- Your current monthly expenses
- What would you estimate your expenses would be if you were to retire early
- How long do you expect to live in retirement
- What will your main income sources be before you’re eligible for Social Security benefits or to make penalty-free withdrawals from a 401(k) or IRA
- How much you currently have saved outside of a 401(k) or IRA
- How long do you have to save and invest until age 55
Pinpointing a specific number to aim or gets easier when you take time to answer these questions. For example, you may be wondering if it’s possible to retire at 55 on $500,000 or $1 million. Or you may think $2 million is closer to the mark.
Using some basic rules of thumb can help you come up with an answer. For example, a commonly accepted piece of retirement planning advice suggests having seven times your annual income saved by age 55. So if you make $100,000 a year, you’d need $700,000 saved by your 55th birthday.
But that’s only part of the equation. Based on your estimated retirement budget, you also have to figure out how long that $700,000 will last and how much more you may need to save.
Healthcare and Early Retirement Expense Considerations
One expense you can’t afford to overlook when retiring at 55 is healthcare. Medicare can pay for certain healthcare expenses in retirement, but you won’t be eligible to enroll until the year you turn 65. So that leaves a 10-year gap in which you’ll need to make other plans for paying healthcare expenses.
Your options for paying for healthcare may include:
- COBRA coverage
- Purchasing coverage through the healthcare marketplace
- Enrolling in a spouse’s plan
- Healthcare sharing
- Going without insurance
In terms of cost, COBRA coverage may be the most expensive option. This, of course, depends on the type of plan offered by your employer. Getting covered under a spouse’s plan could be the most cost-effective way to manage healthcare costs until you’re Medicare-eligible. But if you’re unmarried or your spouse isn’t covered this may not be an option.
You’ll also need to consider how long-term care needs might affect your plans to retire at 55. Long-term care can easily siphon away thousands of dollars a year from your savings. While you could qualify for Medicaid to help pay for these costs, that usually requires spending down some of your assets first. A Medicaid asset protection trust could help you to avoid that scenario. Talking to your financial advisor or an estate planning attorney can help you decide if it’s right for you.
One way to determine how much you will need to save for healthcare costs is to factor in your actuarial age, which estimates your life expectancy based on mathematical calculations and statistics. The Social Security Administration breaks down average life expectancies based on age. According to their table, a man at age 70 can expect to live roughly 14 more years, while a woman the same age could expect almost 16. And planning for this ahead of time can help make your early retirement sustainable.
Bottom Line
Retiring comfortably at age 55 is an attainable goal, but it hinges almost entirely on your financial situation. Success requires substantial savings generated through years of disciplined contributions and investment growth. You also need a clear plan for accessing funds before traditional retirement ages and covering significant costs like healthcare. Ultimately, retiring at 55 requires transforming the dream into a concrete plan backed by sufficient financial resources.
Retirement Planning Tips
- A financial advisor can walk you through the idea of early retirement and whether or not it’s feasible for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s retirement calculator to get a quick estimate of how you’re doing saving for retirement.
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