Retiring at age 58 may seem like an impossible dream, but by following a specific process, which we outline below, you can determine the likelihood of such a move being within your grasp. The key is to carefully gauge your financial requirements in retirement, estimate your longevity, anticipate cash flow and then build a plan to live within the possibilities you have identified. You may want to consider working with a financial advisor as you put together your retirement plan.
Estimate Your Retirement Expenses
The first step is to determine the annual expenses you expect to incur in a comfortable retirement. This depends quite a lot on your lifestyle and personal needs, as well as where you live. A city dweller who rents will need to anticipate ongoing housing payments, for example, while a homeowner who paid off their mortgage will not. If you would like to travel and have adventures, that should be in the budget, while a homebody may need less cash on hand.
Don’t just ballpark this. Instead, go over your bank and credit card statements. If you wanted to maintain your current standard of living based on how much money you spend today, how much retirement income would you need per year? Start there, then adjust based on reasonable expectations.
If you’re young, don’t forget that your standard of living will probably increase. And don’t forget to account for insurance expenses during the seven years before you can enroll in Medicare. Finally, make a reasonable effort to estimate how inflation will affect your projected expenses.
Accounting for Healthcare Costs
This may be your single greatest retirement expense, as you’ll have seven years between when you lose employer benefits and when you become eligible for Medicare. First, find out what private insurance will cost after you retire. While it’s impossible to know for certain, get a best-guess on how much money you should plan on per year for premiums and other costs on a single-payer plan. Include that in your cost estimates when deciding how much you need to retire.
Second, determine how much additional money you will need for healthcare once you enroll in Medicare. This program will reduce your expenses significantly but not completely, as Medicare is not a comprehensive program. While this is not unique to retiring early, all retirees need to prepare for medical expenses, so make sure you do so.
Planning Out Your Retirement Income
If you assume a 100-year life expectancy, retiring at 58 means that you’ll need 42 years’ worth of income. From there, the process is fairly straightforward arithmetic. For example, say you also decide that you’ll need $50,000 per year on which to comfortably live. Your retirement savings will need to be: $50,000 x 42 = $2.1 million. So over the course of your retirement, you will need a grand total of $2.1 million in order to retire at age 58.
Now you can account for your anticipated Social Security payments. Using a Social Security life expectancy calculator, you can reduce these savings by your anticipated Social Security benefits. For example, say you expect to begin collecting $1,000 per month starting at age 67. At a life expectancy of 100 years, this would give you: $1,000 x 12 months x 33 years = $396,000
So, taking into account both parts of this example, you can expect to actually need savings of around $1.7 million to retire at age 58. That’s because Social Security will, at least partially, help you get there.
How Long Will Your Retirement Savings Need to Last?
Put bluntly, how long do you expect to live? Or to put it differently, for how many years will your nest egg need to provide for you? To retire at 58 you are essentially adding four, seven or 12 years to your retirement plan. While difficult to pin down, a conservative rule of thumb nowadays is to plan on living until you’re 100. This may seem like a stretch, but nearly a third of all retirees live into their 90s today. As healthcare continues to improve, that number will almost certainly improve every year.
You can use the Social Security Administration life expectancy calculator above, but financial advisors recommend adding five to 10 years to the results, depending on how conservatively you want to plan.
Don’t underestimate this. In addition to being less morbid, the risks of underestimating your own lifespan are serious. In your early retirement you can always try and go back to work, but in your 90s with failing health it will likely be impossible to do so.
Anticipating Your Income in Retirement
Cash flow in retirement will come from two sources, the government and private retirement savings accounts like IRAs and 401(k)s. It’s imperative to be clear-eyed about what each of these two sources can actually deliver.
Social Security Benefits
If you retire at 58 you will have anywhere from four to 12 years between when you retire and when you begin collecting Social Security. You will need to ensure that you have enough money saved up to cover this gap. The earliest you can start collecting Social Security benefits is age 62, though the monthly payments will be less than 100% of what you’d get if you waited to full retirement age, which is 67. Waiting longer than full retirement age to start getting these benefits increases the amount you will get.
However, beyond age 70, at which point you’re entitled to 124% of the monthly benefits you would have received starting at age 67, there are no more increases in monthly benefits. (Note: All figures in this article apply to people born in the year 1960 or later.) Also, keep in mind that you cannot enroll in Medicare until age 65.
Retirement Account Withdrawals
If you want to retire at 58, you need to account for the rules that surround tax-advantaged retirement accounts. With a 401(k), you ordinarily cannot withdraw money penalty-free before age 59.5. However, there is an exception to this is called the Rule of 55. Under this rule, the IRS allows you to begin making standard withdrawals from a 401(k) account if you leave your job during or after the year you turn 55. This rule also applies to similar programs, such as a 403(a) or 403(b).
The Rule of 55 does not apply to IRAs and Roth IRAs. If you withdraw money from either of these programs before turning 59.5 years old, again absent special circumstances, you pay extra taxes on the withdrawals.
For retiring at 58 years old, ultimately, this is a minor difference. You can begin making 401(k) withdrawals immediately and can begin withdrawing money from your IRA within 18 months of retirement at most. This means that, so long as you anticipate that 18-month gap, you can include your retirement accounts in your early retirement planning.
Managing Your Investment Portfolio’s Asset Allocation
The reason to think about asset allocation is because of how long your investment portfolio will have to sustain you. In other words, retirement doesn’t mean investors should rid themselves of stocks, according to Morningstar’s John Rekenthaler. On the contrary. Portfolios that contain equities can support higher safe withdrawal rates than those dominated by bonds, and result in significant surpluses even after 30 years of retirement spending. While past results don’t guarantee future performance, equities should play an even larger role in the investment portfolios of retirees. That’s all the more true given continual expansions of longevity.
“Should the future resemble the past, the lesson will remain valid. Retirees should invest heavily in equities, most likely more than they currently do,” Rekenthaler said. “But the advice rests upon that initial assumption.”
Building a Comprehensive Retirement Plan
Now that you’ve estimated what you expect to need each year of your retirement, adjusted for inflation, settled on how long you expect to live and added up sources of money, you’re ready to put pen to paper and construct a plan.
If it’s clear that your sources of money will not support the lifestyle you have hoped for then you will need to dial back some of the “wants” you have had for a retirement. On the other hand, if your sources of money are more substantial than you expected you may be in a position to live more luxuriously in retirement than you anticipated.
Keep an eye on this plan; it could need tweaking. Inflation may be different than you have calculated. Your investments may do better or worse than you estimated. Your healthcare needs may also increase, particularly if you end up needing long-term care. For reasons like this, it’s wise to work with a financial advisor as you create and update your plan.
Bottom Line
Planning to retire at 58 requires much the same process as planning for any stage of retirement. The key difference is making sure that you anticipate a gap in government benefits, as well as the loss of income during peak earning years. Aside from that you must estimate what you’ll need each year
Retirement Tips
- Consider working with a financial advisor as you make a retirement plan. 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.
- The hardest part of this process is the last step: calculating how you can build up your retirement savings. What do you need for retirement? How much should you contribute each year, and what kind of growth will you need to bring it all together? With SmartAsset’s retirement calculator you can begin to answer these questions for yourself.
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