Choosing the right age for retirement means understanding all the planning that’s required beforehand, as well as what you may need to do afterward if you retire early. The way you shape your financial plan can be very different if you plan to retire at 57, for example, versus waiting until age 65. While retiring at 57 might be your goal, you’ll need to understand what early retirement means when it comes to things like Medicare planning, retirement account withdrawals and Social Security. If you have questions about your specific situation, consider speaking with a financial advisor.
Challenges of Retiring at 57
If you want to retire at 57, the first step is recognizing the unique challenges you may face financially. Specifically, some of the issues you’ll have to contend with include:
- Covering income gaps until you’re eligible for Social Security benefits
- Paying for healthcare coverage until you’re eligible for Medicare
- Generating income until you’re eligible to withdraw from qualified retirement plans (only exception is the rule of 55 for 401(k)s)
- Managing early withdrawals from 401(k) plans or individual retirement accounts (IRAs), if necessary
- Saving enough so that you don’t run out of money in retirement
If you’re married, you’d also need to consider the timing for your spouse’s retirement if they’re working. And if you have kids, you may want to think about how retiring at 57 may affect your ability to save for or help with their college expenses if that’s something you’d like to do.
How Much Money Will You Need to Retire at 57?
The amount of money you’ll need to retire at 57 can depend on several things, including:
- Your anticipated retirement lifestyle and retirement budget
- Your life expectancy
- Where you expect your retirement income to come from
A common rule of thumb for retirement saving is to have 10 times your income in the bank by age 67. So if you make $75,000 a year, you’d want to have $750,000 saved for retirement.
You could still follow this rule if you plan to retire at 57. But you have to balance that against the fact that this money is going to need to last you longer if you’re retiring early. For that reason, you may want to increase your multiplier to 12, 15 or even 20 times your income, based on your desired retirement lifestyle.
This is where a retirement calculator can help. For example, say you’re 30 years old making $75,000 a year. You want to retire at 57 and plan to spend $3,000 a month in retirement, with a life expectancy to age 95. Based on those numbers, you’d need approximately $2.2 million in retirement savings. If you’re starting from $0 with savings, you’d need to set aside $2,000 a month and earn a 7% average annual return to have enough money to retire at 57.
That’s not an unrealistic goal if you’re disciplined about sticking to it. Planning your retirement budget, analyzing your current savings and savings rate, then running the numbers through a calculator can tell you if you’re on track or if you need to make significant adjustments to your savings rate. While you’re reviewing your savings rate, check the amount you’re saving in your 401(k) if you have one.
If you’re not saving enough to get the full employer match, you may want to make adjustments to your savings rate. And if you can afford to step up your contributions to reach the annual maximum limit that could help you to get closer to your goal of retiring at 57. The same applies to maxing out an IRA.
401(k) and IRA Withdrawals
Both a 401(k) and an IRA have age restrictions on withdrawals. Generally, IRS rules prohibit taking money from these accounts before age 59 ½ without a penalty, unless you qualify for an exclusion or exception. That means if your goal is to retire at 57 you’ll have to decide whether to leave the money in these accounts alone until you reach the age threshold or take money out early and pay the penalty.
The early withdrawal penalty for early withdrawals from a traditional IRA is 10%, plus ordinary income tax on the amount withdrawn. With a Roth IRA, you can withdraw your original contributions at any time without a penalty, as long as your account has been open five years or longer. Early withdrawals of earnings could trigger a 10% penalty and you may owe income tax.
There is a work-around of sorts. You could convert traditional IRA assets to a Roth IRA. In that instance, the 10% early withdrawal penalty would only apply if you’re taking money out within the first five years of completing the conversion. You can’t escape tax liability completely, however, since you’d owe ordinary income tax on any traditional IRA amounts you convert at the time of the conversion.
With your 401(k), you could take advantage of the rule of 55. This IRS rule says that if you leave your job at age 55 or older you can take money from your 401(k) without an early withdrawal penalty. You’d still have to pay income tax on the money you withdraw but it’s good to know that you could tap into your 401(k) early without a penalty if you don’t have other savings to fall back on.
Can I Take Social Security at 57?
The short answer is no, you’re not eligible to receive Social Security retirement benefits at age 57. The earliest you can begin taking Social Security for retirement is age 62. So if you plan to retire at 57 you’ll be waiting at least five years before you can claim those benefits. And you may want to wait until you reach full retirement age or later if you don’t necessarily need Social Security to supplement your income right away.
Keep in mind that taking Social Security before full retirement age reduces your benefit amount while delaying benefits can increase the amount you receive per month. So consider the best time to take Social Security, based on the other sources of income you have.
If you plan to take Social Security at 62, you’ll have to figure out where your income is going to come from during those in-between years. Again, taking money from an IRA early can result in an early withdrawal penalty. So you may want to tap into a taxable brokerage account instead. The downside of that, however, is that you’ll owe capital gains tax if you’re selling off assets at a gain. That can affect your tax liability year to year in early retirement.
You could draw on other savings, such as money held in CDs, U.S. Treasuries or a high yield savings account. You may still pay tax on interest earned but it’s likely to be less than what you would owe in capital gains for an investment account.
Healthcare Planning for Early Retirement
Medicare eligibility doesn’t begin until age 65, meaning that if you plan to retire at 57 you’ll have an eight-year gap in which you’ll need to consider how to manage health care. If your spouse is still working you may be eligible to join their health care plan. But if your spouse plans to retire early or doesn’t have health insurance at work you’ll need to assess your options.
COBRA coverage may cover the gap temporarily, though premiums may be expensive and take a toll on your retirement budget. You could also look into purchasing insurance through the health care marketplace. Healthcare sharing plans, which aren’t insurance but allow you to pool medical bills with other people, are a third option.
If you have a health savings account (HSA) as part of your high deductible health plan, this can be an untapped goldmine for early retirement. The money that goes into an HSA is designed to be used for health care. Unlike a Flexible Spending Account (FSA), an HSA is not use it or lose it, meaning you can allow the money to sit until you need it. Meanwhile, this money can earn interest if you’ve invested it.
During your working years, you can contribute up to the HSA limit the same way you would a 401(k) or IRA. Your employer may offer a matching contribution to your 401(k) account. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when you use them to pay for qualified medical expenses, which can include health care costs incurred prior to becoming Medicare-eligible. And at age 65, you can use the money in an HSA any way you like, which is a plus if you stay healthy. You’ll just have to pay income tax on withdrawals for any non-medical expenses.
Also, consider what your long-term health care needs may be. Medicare does not cover long-term nursing care, though it is covered by Medicaid. But to become Medicaid-eligible you’d need to first spend down your assets. If you’d rather avoid that, you may want to look into purchasing a long-term care insurance policy or a hybrid life insurance policy in your 40s or early 50s so that if the time comes, you have insurance to pay for nursing care if necessary.
Deciding to retire at 57 is a goal that requires some forethought, planning and careful calculations. The last thing you want is to run out of money in your later years when you’re supposed to be enjoying traveling, spending time with your family and relaxing. Meeting with a financial advisor can help you come up with a workable plan that you can review each year and adjust as needed. Depending on how far you are from your desired retirement year, this level of planning could be just what you need to make your dream a reality.
Retirement Planning Tips
- Consider talking to a financial advisor about whether retiring at 57 is a realistic goal for your personal situation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- An annuity can provide a steady stream of income in retirement. Annuities are insurance contracts in which you pay a premium upfront and the annuity company then pays the money back to you at a later date. You could use an annuity to supplement your income in the period between age 57 and whenever you plan to take Social Security or become eligible for penalty-free 401(k) or IRA withdrawals.
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