Retiring at age 55 will take some careful financial planning, but if you're a diligent saver and/or earn a healthy income, you may be able to achieve that goal. While retiring at age 55 may seem like a dream to many, there are financial risks involved in hanging up your work boots that early in life.
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The biggest risk is that you outlive your money, so it's important to calculate just how much you should save if you want to retire at 55. But there are other financial issues surrounding an early retirement at age 55 that you should be aware of. Here's a look at how much you might need to retire at 55, what ancillary problems you might have to deal with and steps you can take to help you achieve this goal.
How Much Should You Have Saved?
Many financial advisors suggest that you should plan on living off about 80% of your current income after you retire. Thus, if you currently earn $60,000 per year, you'll need a big enough retirement account to fund an annual salary of about $48,000 per year for the rest of your retirement. But others recommend saving enough to fund 100% of your current income, figuring that certain expenses like travel and healthcare will actually increase. If you have the means, it's always best to over-prepare financially, meaning you should shoot for that 100% figure if you're able.
Imagine you want to draw $60,000 per year from your savings starting at age 55. If your money is uninvested and just sitting in cash, you should plan on saving at least $2.1 million, as that will fund your withdrawals through age 90, according to online retirement calculators. But if you invest your money at a 5% annual return - increasing annual withdrawals by 3% to account for inflation - you'll only need to save about $1.5 million.
Bear in mind that the earlier you retire, the greater the variability there will be in your planning. Investment returns can vary considerably from year to year, and the longer you have to fund your retirement, the more likely that you'll encounter an unexpected expense. Retiring at 55 also brings other complicating factors, such as the taxes and penalties that you may face withdrawing from retirement accounts.
What About Taxes and Penalties?
Retirement funds are generally meant to be accessed at age 59 ½ or later. If you take money out of an IRA before age 59 ½, for example, you'll owe a 10% early withdrawal penalty on top of the ordinary income tax you'll pay on the distribution. Although Roth IRAs allow qualifying tax-free withdrawals, you'll still owe the 10% early distribution penalty if you take money out before age 59 ½. The same is generally true for 401(k) plans, but there is an exception that may actually work to your advantage. If you "separate from service" as early as age 55, you can take penalty-free withdrawals.
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How Does Retiring at Age 55 Affect My Social Security?
Another potential problem with retiring at age 55 is that you're still quite a ways from being able to access your Social Security retirement benefits. The earliest you can file for Social Security is age 62, so you'll have at least seven years of retirement without Social Security benefits. Retiring at age 55 might also lower the amount that you'll eventually receive as your Social Security retirement benefit is based on the top 35 years of your earnings. Retiring at age 55 - when you're likely at the peak of your earnings power - means that your ultimate Social Security benefit will likely be lower than it could have been if you worked instead until age 62 or later.
What Happens With My Medicare If I Retire at Age 55?
Your Medicare isn't technically affected if you retire at age 55, but you still won't be able to access its coverage until you reach age 65 unless you have a qualifying disability. That leaves you with 10 full years until you get government health coverage, so you'll have to factor private insurance into your budget for at least that long.
How To Save More If You Want To Retire at 55
If you're going to retire early, it pays to take steps to save as much as possible so that you don't outlive your money. Once you turn 50, you should absolutely take advantage of IRS provisions allowing "catch-up" contributions to retirement plans. For example, in 2022, the IRS allows you to kick in an additional $1,000 every year to your IRA account, bringing your maximum allowable contribution to $7,000. If you have a 401(k), the benefit is even greater as the "catch-up" provision jumps to $6,500. This means that you can put in a whopping $27,000 to your 401(k) plan every year after you turn 50.
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This article originally appeared on GOBankingRates.com: How Much You Need To Retire at 55