Planning for Income
The average life expectancy was 77 years in the U.S. in 2020. If you retire at 55, you’ll probably need your assets to generate income for at least two decades. If you want to have enough income, you’ll need an accurate estimate of how much you plan to spend each year. Then, you’ll need to compare that to your current sources of retirement income. To learn how long you may live, the Social Security Administration has a simple calculator to give you a rough estimate. Social Security benefits are available at age 62 in most cases, but at a reduced rate until you reach full retirement age. If you were born in 1960 or later, you won’t receive your full Social Security benefits until age 67. In addition to owing income taxes when you withdraw from a traditional IRA or 401(k), there are typically penalties if the withdrawals begin before age 59 1/2. So, if you do decide to retire at 55, you’ll need to have other sources to tap into for a few years. If you make enough, you could set aside some savings to see you through those years. If that’s not an option, there are, potentially, other ways to tap into your 401(k) or IRA early and avoid the withdrawal penalty. Another option is to use substantially equal periodic payments (Rule 72(t)) to withdraw money early from a traditional IRA or 401(k). This would allow you to avoid the 10% early-withdrawal tax. With this approach, your life expectancy, based on IRS tables, is used to calculate the amount you would need to withdraw. You would, essentially, receive the same amount each year, and you must receive that amount for five years or until age 59 1/2, whichever is later. Applicable taxes also need to be paid when you withdraw the money. Calculating these payments can be complex, but your accountant or plan custodian can help you explore this option. In addition, if you have a workplace 401K you may be eligible for an IRS exception to the penalties for early withdrawals referred to as the “Rule of 55.” The Rule of 55 may allow you to take penalty-free withdrawals from a 401(k) before age 59 1/2, if you leave your employer for any reason in the year you turn 55 or later. The same loophole does not apply to traditional IRA withdrawals, though.
Paying for Health Care
Medicare coverage doesn’t start until age 65. If you want to retire at age 55, you’ll need a source of health insurance that will provide for you until you reach age 65. The Affordable Care Act guarantees access to health insurance, even with pre-existing conditions. You can’t be charged a higher rate for any health issues, but premiums are based on age. The average monthly premium was $771 for people between the ages of 55 and 64 under the Affordable Care Act in 2021. If you’ve had a healthcare plan and have been able to keep it, you might be able to keep your monthly payments down. The Kaiser Family Foundation has a calculator to view average healthcare premiums in your state. Depending on your income, you may be able to apply for subsidies. A single 55-year-old with an annual income of $60,000 can purchase a Silver plan through the Marketplace for $425 per month in 2022.
Using Your Time
When thinking about early retirement, give a lot of thought to what you want to do with your time and money. If you have expensive hobbies, think about those extra costs when planning. If you want to travel, decide whether to maintain a home or choose to rent, so you won’t be tied down. If you’ve always wanted to start a business, retirement could be a good time to start. The Kauffman Indicators of Entrepreneurship stated in 2020 that those aged 55 through 64 had the second-highest startup rate (tied with those aged 35 through 44). You could use your prior experiences to start a consulting business or turn a hobby into a job. If you don’t want to work, volunteering is a way many retirees stay busy. You might have other commitments, such as caring for family members. No matter how you plan to spend your time, proper planning can make retiring at age 55 a reality.
