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.
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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. But if you invest your money at a 5% annual return — increasing annual withdrawals by 3% to account for inflation — you’ll need to save only 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.
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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.
How Does Retiring at Age 55 Affect Your 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 your ultimate Social Security benefit likely will be lower than it could have been if you worked instead until age 62 or later.
What Happens With Medicare If You 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 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 2024, the IRS allows you to kick in an additional $1,000 every year to your IRA account, bringing your maximum allowable contribution to $8,000. If you have a 401(k), the “catch-up” provision is $7,500.
Laura Beck contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: Retirement Savings: Here’s How Much You Need To Retire by 55
On average, you'll need to have saved $1,051,814 to retire at 55 years old. This is based on the median earnings of Americans according to the Bureau of Labor Statistics' October 2023 Current Population Survey in weekly earnings.
How Much to Retire at 55? Fidelity estimated that those saving for retirement should have a minimum of seven times their salary by age 55. That means that if your annual salary is currently $70,000, you will want to plan on saving at least $490,000 saved.
At the time of writing the median household income in the United States was about $70,800, so you would plan for a retirement income of $56,640. At that rate of withdrawal, a $750,000 portfolio would last a minimum of 13 years.
Your money earns a 5% annual rate of return while inflation stays at 2.9%. Based on those numbers, $600,000 would be enough to last you 30 years in retirement.
If you have multiple income streams, a detailed spending plan and keep extra expenses to a minimum, you can retire at 55 on $2 million. However, because each retiree's circ*mstances are unique, it's essential to define your income and expenses, then run the numbers to ensure retiring at 55 is realistic.
Will $1 million still be enough to have a comfortable retirement then? It's definitely possible, but there are several factors to consider—including cost of living, the taxes you'll owe on your withdrawals, and how you want to live in retirement—when thinking about how much money you'll need to retire in the future.
However, you unfortunately cannot begin receiving Social Security retirement benefits at 55. The earliest age you can begin drawing Social Security retirement benefits is 62. But there's a catch. Taking Social Security benefits prior to reaching your full retirement age results in a reduction of your benefit amount.
The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances. Taken on their own, those numbers aren't incredibly helpful. There are a variety of decent retirement savings benchmarks out there, but how much money other people have isn't one of them.
Summary. While retiring on $400,000 is possible and above the average retirement savings, you may need to adjust your lifestyle expectations if this is your final retirement amount. If you want to retire early, $400,000 might be a difficult number to make stretch.
The short answer is yes, $500,000 is enough for many retirees. The question is how that will work out for you. With an income source like Social Security, modes spending, and a bit of good luck, this is feasible. And when two people in your household get Social Security or pension income, it's even easier.
Key findings. In 2022, the average (median) retirement savings for American households was $87,000. Median retirement savings for Americans younger than 35 was $18,800 as of 2022.
While $1,500 might not be enough for non-housing retirement expenses for many people, it doesn't mean it's impossible to stick to this or other amounts, such as if you're already retired and don't have the ability to increase your budget.
Retiring at 65 with $1 million is entirely possible. Suppose you need your retirement savings to last for 15 years. Using this figure, your $1 million would provide you with just over $66,000 annually. Should you need it to last a bit longer, say 25 years, you will have $40,000 a year to play with.
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
If you have $1.5 million saved and aim to retire at 55, you can. However, this depends on your withdrawal rate – how much you consistently take from your savings – and how long you live. The 4% withdrawal rule suggests taking 4% of your initial nest egg in year one, adjusting for inflation yearly.
You can probably retire at 55 if you have $4 million in savings. This amount, according to conventional estimates, can reliably produce enough income to pay for a comfortable retirement.
Yes, $6 million is more than enough to retire at age 55, especially with smart money management and budgeting. Just make sure you are aware that this will involve sacrificing a lot of potential gains in your portfolio overall.
Assuming you'll live to be 85 and won't want to work after retiring, you can anticipate a need for 20 years of income. If you're able to retire with $200,000 at 65, that will equate to $10,000 a year, or approximately $833 a month.
Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.
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