Table of Contents
Table of Contents
- Retiring at 55 requires careful planning and budgeting since Social Security benefits are not available until 62, and Medicare eligibility starts at 65.
- Before estimating savings needed, determine your retirement budget by analyzing expected expenses for housing, insurance, travel, utilities, food, and lifestyle choices.
- Calculate the income required to meet your retirement budget, especially considering the absence of Social Security for the first seven years.
- Choose retirement plans wisely, like a 401(k), to access funds without penalties before age 59 1/2, or consider a brokerage account for additional flexibility.
- Besides Social Security, consider other sources like pensions or annuities to supplement retirement income.
Chances are you'd feel like you had the time and energy to do just about anything you wanted. It's a nice dream — but is it possible? That could depend on your retirement needs and savings strategies. Here are some tips to help you answer the question.
How Much Do You Need to Budget to Retire at 55?
Figure Out Your Retirement Budget
Before you can estimate how much you'll need in savings, you first need to figure out your retirement budget. How much will you need per year to pay your bills after you retire? Your retirement budget depends on your plans and expenses. You can break down what you think your actual budget will be like based on what you expect to pay for housing, insurance, travel, utilities, food and other bills, as determined by your lifestyle.
Calculate Your Income
Once you know your target retirement budget, you can start calculating the income you'll need to get you there. One of the major challenges of retiring at 55 is that you won't yet be eligible to collect Social Security. The earliest you can start taking Social Security is at 62, so for at least your first seven years of retirement, you'd need to cover all of your expenses on your own.
Your Savings before Age 62
Fortunately, your savings can continue to earn some interest during this period, which might help you meet some of your financial needs. Any investments in retirement plans, on the other hand, are not guaranteed to grow like a banking account, and it's possible they may lose value in that time.
How Will You Save for Retirement at 55?
As you invest your savings, you may want to carefully consider which retirement plan you use. If you retire at age 55, you can generally take money out of a 401(k), if applicable. But if you take money out of an IRA before you turn 59 1/2, you'll owe a 10 percent early-withdrawal fee. This applies even if you're fully retired.
To prepare to retire at 55, you might consider either saving through a work-sponsored plan and/or keeping some money in a brokerage account, which you can access at any time. You could then spend that money until you turn 59 1/2 and start using your IRA funds.
When Are You Eligible for Medicare?
Another concern is that you can't go on Medicare until you turn 65, which means you'd need to maintain your own health insurance for at least 10 years after retiring at age 55. This can get more expensive as you grow older, especially if you don't qualify for a tax credit to offset the premiums. You can estimate how much your premiums will be once you retire, but keep in mind they'll likely change.
How Much Retirement Income Will You Need at 55?
You may want to have as much as 80 percent of your work income in retirement (although such an estimate will differ from person to person).1 This income will likely come from a few sources.
Once you turn 62, you can start taking Social Security, though at a reduced level (full benefits kick in at age 67). The average Social Security payout is $20,419.44 per year.2 If you've been earning a relatively high salary and paying more Social Security taxes, your payments could potentially be higher. What's needed to cover the remainder of your budget will have to come from other arrangements you've made. It's also worth keeping in mind that the Social Security trust is currently set to expire as soon as 2034.
Pension or Other Sources of Retirement Income
If you have a pension or other source of retirement income, you'll likely need less per year from your savings than if you relied on savings alone. Again, it's important to remember that investment earnings are not guaranteed, and contributions can lose value over time.
Contributing to an Annuity
To help budget your savings, you could move some of your money into an annuity. These savings contracts can set up guaranteed payments for the rest of your life, helping you determine exactly how much will be coming in each year. These contracts are not FDIC-insured, however, and you and your estate could lose your contribution in the event of the issuing company's failure or your unexpected death.
If you're serious about retiring early, consider meeting with a qualified financial adviser to run these calculations in more detail.
How to Make It Easier to Retire at 55
If you can downsize your lifestyle for a lower income, it may be easier to retire young. Some ways to do this include:
- Moving to a smaller house or a lower-cost area
- Taking fewer trips
- Cutting down on going out
- Moving abroad to another country
- Reduce or eliminate any outstanding debt
- Switch to part-time work at age 55, such as working freelance at home or moving into a lower-paying but more interesting field.
At a time when most Americans are delaying retirement, leaving the workforce at 55 will likely not be easy. But with disciplined saving throughout your career, a smart retirement budget and effective planning, you can make it a possibility.
- How much money do you need to retire? A good rule of thumb is to save enough to cover 80% of your pre-retirement income. https://fortune.com/recommends/investing/how-much-money-do-you-need-to-retire/.
- Monthly Statistical Snapshot, June 2023. https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/.