Thinking about retiring early? The idea can be tempting, but before making any decisions, you’ll want to carefully consider your financial situation.
It is possible to retire early at age 55, but most people are not eligible for Social Security retirement benefits until they're 62, and typically people must wait until age 59 ½ to make penalty-free withdrawals from 401(k)s or other retirement accounts.
For most people, full retirement age — the age at which they’re entitled to 100% of their Social Security retirement benefits — is 67 in the United States.
People with 401(k)s at work may be able to to withdraw money early from those accounts penalty-free — if they leave their jobs at age 55 and up (this is often called the "rule of 55").
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Can I collect Social Security and other retirement benefits at age 55?
If you retire at age 55, you probably won’t be eligible to receive Social Security retirement benefits for several years or be able to withdraw money from your retirement accounts without paying a 10% early withdrawal penalty. Additionally, for most people, Medicare won’t kick in for another 10 years.
Source | Typical minimum age for benefits |
|---|---|
Social Security | 62. |
Medicare | 65. |
401(k)s | 59 1/2. |
Individual retirement accounts, or IRAs | 59 1/2. |
Although you can begin receiving Social Security benefits at age 62, that's often not the best time to start. The Social Security Administration reduces your check by as much as 30% for life if you start taking benefits before you reach full retirement age. However, you’ll receive 100% of your benefit if you elect to wait until full retirement age, and you'll get a bonus for every year (up to age 70) that you delay taking benefits.
» Plan ahead: Should you take Social Security at 62, 67 or 70?
One other thing to note is that the more you pay in Social Security tax (typically through payroll taxes withheld from your paychecks), the higher your Social Security retirement benefits are. Accordingly, leaving the workforce early could affect the size of your eventual Social Security retirement benefit.
🤓Nerdy Tip
Did you know that Medicare Part B premiums are usually automatically deducted from your Social Security retirement checks? Learn more about how much Medicare actually costs.
» Learn more: ‘Bridge’ your way to Social Security
Estimate your Social Security retirement benefits
Your actual benefit may be lower or higher than estimate made with this calculator, because it does not take into account your actual earnings history.
We assume you have earnings every year until you begin receiving Social Security benefits. If you had several years of noncovered employment or your earnings changed significantly from year to year, this calculator will overestimate or underestimate your benefit.
How can I bridge an income gap if I retire at 55?
Although retiring early at age 55 doesn’t make you eligible for Social Security or most government benefits for retirees, there are a few exceptions and strategies to know that could help you bridge an income gap.
Exceptions to 401(k) early withdrawal rules
In most cases, you’ll be subject to a 10% early withdrawal penalty if you take money from your 401(k) before you’re 59 ½. But according to the IRS, these circ*mstances may allow you to skip the penalty:
You quit your job in or after the year you turned 55.
You’re totally and permanently disabled.
You agree to take “a series of substantially equal periodic payments over your life expectancy.”
You had tax-deductible medical expenses that exceeded 7.5% of your adjusted gross income.
You were a reservist called to active duty for at least 180 days after Sept. 11, 2001.
You had or adopted a child (for withdrawals up to $5,000).
You quit your job as a federal or state government public safety employee when or after you turned 50.
Exceptions to IRA early withdrawal rules
Generally, money taken out of an IRA before age 59 ½ is subject to a 10% early withdrawal penalty unless one of these exceptions applies:
You become totally and permanently disabled.
You have qualified higher education expenses.
You agree to take “a series of substantially equal periodic payments over your life expectancy.”
You are a first-time home buyer (for withdrawals up to $10,000).
You had tax-deductible medical expenses that exceeded 7.5% of your adjusted gross income.
You were a reservist called to active duty.
Pension plans
Depending on where you’ve worked, you may be able to take withdrawals from a pension on or before you turn 55. Check with your employer to see if you’re eligible. Teachers in California, for example, might be able to retire at age 55 if they have at least five years of service credit. Members of the U.S. military, meanwhile, typically can retire at any age after 20 years of service.
» Learn more: Pension plan vs. 401(k): Types, pros and cons
Nonretirement accounts
Although most types of retirement accounts limit how much you can contribute in a year, there are usually no limits to how much you can invest in high-yield savings accounts, stocks, bonds, mutual funds, exchange-traded funds or other investment vehicles. In particular, bonds, bond funds, dividend stocks and dividend funds might provide monthly income regardless of your age.
HELOCs
Do you own a home? If so, a home equity line of credit, or HELOC, may be an option. These loans let you borrow against the equity in your home without needing to sell or refinance your home. The fees for a HELOC vary, and you must repay the loan.
Absolutely, retirement planning can be intricate, especially considering early retirement. Let's delve into the concepts embedded in the provided article.
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Social Security Retirement Benefits:
- Eligibility typically begins at age 62 for reduced benefits. Full retirement age is often around 67, granting 100% of the benefit. Delaying benefits until age 70 increases the benefit amount.
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Retirement Account Withdrawals:
- The "rule of 55" allows penalty-free withdrawals from 401(k)s if leaving a job at age 55 or older. However, the standard age for penalty-free withdrawals from 401(k)s and IRAs is 59 ½.
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Medicare Eligibility:
- Medicare eligibility generally begins at age 65, not aligning with early retirement at 55, leading to a potential gap in healthcare coverage.
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Impact of Early Retirement on Benefits:
- Early retirement before full retirement age can decrease Social Security benefits. The more one contributes via payroll taxes, the higher the eventual Social Security benefit.
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Income Bridging Strategies:
- Various exceptions exist for penalty-free early withdrawals from retirement accounts, such as disability, substantially equal periodic payments, certain medical expenses, adoption, active duty, or being a first-time homebuyer.
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Pension Plans:
- Eligibility for pension withdrawals before age 59 ½ varies. Some professions allow for earlier retirement based on years of service. For instance, teachers in California with five years of service credit may retire at 55.
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Nonretirement Investments:
- Investing in nonretirement accounts like stocks, bonds, mutual funds, and high-yield savings accounts can offer income regardless of age. Dividend stocks or funds might provide regular income.
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Home Equity Line of Credit (HELOC):
- Homeowners can consider HELOCs, allowing borrowing against home equity without selling or refinancing. However, these loans come with varying fees and repayment obligations.
Navigating these factors requires a tailored approach to ensure financial stability and security during an early retirement phase. Various financial instruments and strategies can help bridge the income gap, but meticulous planning and consideration of individual circ*mstances are crucial.
