How to Retire Effectively at 55 (and Enjoy a Comfortable Lifestyle)
Do you want to retire at age 55? Early retirement isn’t for everyone, but it can be a great fit for those wanting a change of pace. The reality is, the many financial products and services that are now available in the marketplace are allowing more people to do this.
In this article, we will go over steps to take when you are retiring at age 55. Let’s look at how much money you might need for retirement at 55, what some optimal retirement options are, what you should know about your accounts at 55, and much more. Read on for some practical tips on how to retire efficiently at 55 or in that time bracket.
Can You Retire at 55?
In many cases, the answer can be probably so. It hinges on a number of variables, such as how much money you have saved, your retirement goals, what your lifestyle will cost, where you will live, and more.
If you want a baseline comfortable lifestyle, financial experts generally say to have at least $500,000 in retirement savings. But that number can be more or less depending on your situation and retirement expectations.
Some people will want a retirement filled with action, adventure, and quality of life where they never slow down. Others may wish for a more modest, relaxed, and laidback standard of living. The more places you visit and the more activities you plan to engage in, the more your retirement will cost.
How Much Money Do You Need to Retire at 55?
Once you have decided on the type of life you want to live in retirement, it’s time to start running some hard numbers. Financial experts say that it’s good to aim for replacing at least 70% of your pre-retirement income. But you may have higher income needs depending on your retirement goals.
There is the 10% early withdrawal penalty before 59.5 to keep in mind. You can also find out whether you can start taking distributions from your employer-sponsored retirement plan at this age. Some plans will allow for penalty-free distributions at age 55, as long as certain rules are followed.
You won’t be able to start your Social Security benefits until 62, so other sources of income can be used to pay for your expenses. Annuities are one option that will pay you a guaranteed, predictable monthly income stream. You can tap annuities as one source of guaranteed income until you reach 62 — and even beyond.
Talk to your financial professional about 72(t) distributions from your retirement accounts as well. This lets you avoid the 10% penalty of early distributions from your retirement accounts before age 59.5. However, with a 72(t) distribution you must take distributions for at least five years or until you reach 59.5, whichever is longer.
These distributions must also be taken in equal installments over that timespan. Failure to take any one of those distributions will result in your entire account balance counted as taxable ordinary income for that year.
For example, say you have $400,000 in an IRA and opt for a 72(t) distribution that comes out to $700 a month. Then one day you change bank accounts, and the monthly payment gets rejected from your old account.
This could result in the entire balance of your IRA being taxed at ordinary income rates for that year. Obviously, a mistake like this could have big consequences when you file your tax return for that year.
What Are Your Retirement Options at 55?
You basically have three options when it comes to using your retirement funds.
You can leave your money in your qualified retirement plan, but you will be subject to the terms and conditions of that plan. The early withdrawal penalty rule before 59.5 will also apply.
You can also roll it over to an IRA or convert some or all of it to a Roth IRA. You can also take a lump-sum distribution if you like, but that can be a very expensive course of action that could land you in a higher tax bracket for that year. For that matter, so could a lump-sum Roth conversion, so be sure to consult with your tax advisor before taking either of these actions.
If you did want to consider a Roth conversion, you might be better off spreading your distributions out over two or more years to minimize your tax bill. Again, it’s good to speak with your financial professional and tax advisor in order to explore your options here.
Is It Too Early to Retire at 55?
No, you just need a solid retirement plan to make sure that you stay financially on track. A well-thought-out plan will give you a roadmap to follow. It will let you see where you have been and where you are going.
A plan also gives you flexibility and bandwidth to make changes as needed. You need a plan to set your goals, and then to put that plan into action. Your financial professional — someone who is independent, not beholden to one financial company, and acts in your best interest — can listen to your situation and offer a personalized plan that helps you reach your objectives.
Things to Plan for When Retiring at 55
When you are planning for retirement, there are a few things to keep in mind. First, how much monthly income will you need? Calculate basic living expenses, which will include the following:
- Rent or mortgage payment (if there is one)
- Medical expenses
- Life, health, car, and rental or homeowners’ insurance
- Home maintenance and repair if you have a house
- Pet care
- Car repairs and maintenance
How much additional income will you need for the nice-to-haves and nice-to-dos?
Be sure to pay special attention to healthcare and long-term care, both of which you will need as you move further into retirement. There are options, including annuities, that let you take a dollar of investment and turn that into a multiple of benefits for different long-term care or health needs.
For example, many annuities now will enhance their monthly payout to you if you become incapacitated or otherwise unable to perform at least two out of the six key activities of daily living (ADLs). Some life insurance policies also pay out some death benefit upfront in similar situations.
If you are thinking about these possibilities in retirement, then it can pay off later to explore these innovative options now.
What If You Need Money from Your Retirement Accounts?
Again, 72(t) distributions and other strategies may help you access your money early. But remember the early withdrawal penalty rule, which might apply otherwise. Withdrawals from pre-tax retirement accounts will generally be subject to a 10% penalty on top of taxes due on the withdrawn amount.
Whether you are taking money from your retirement account or an annuity, those distributions are usually treated as ordinary income and taxed accordingly.
Since you are taking retirement account withdrawals in your 50s, it’s good to keep in mind how long that retirement can last as well. Prudent planning will account for at least two decades of retirement (if not three) and make sure that you will have enough income for that period. Your financial professional can help you explore options to get this in order.
Plan for Your Loved Ones’ Financial Security
What about surviving spouse benefits and other survivorship situations to provide for loved ones in the event of untimely death? Life insurance can be a big help to your loved ones by passing on a death benefit to them income tax-free.
If you are eligible to receive a pension, find out how much it will cost you to provide a pension for your spouse after you might no longer be around. In some cases, you may be better off taking your full pension and buying a life insurance policy with some of that money.
Nevertheless, several variables should be considered when it comes to pension maximization. A competent financial advisor can show you what could happen in various scenarios, but you will need to have some data handy to do this.
Have two key pieces of information from your employer regarding your pension payout. The first is how much you will receive if you opt for the straight life payout that stops when you die. The second is how much you will get if you opt for a joint life payout that will pay your spouse after you are gone.
In most cases, the first payout will be larger than the second. So, if your straight life payout comes to $1,000 per month and your joint life payout comes to $700 per month, then in some cases, you may be better off taking the straight life payout and using some or all of the dollar difference between the two payouts to buy a life insurance policy.
Other variables to consider with pension analysis include:
- Your and your spouse’s health and projected longevity,
- Your monthly living expenses, and
- The amount of income that you could generate using the death benefit from the life policy.
Many financial advisors have software that can project different scenarios based on the variables that are input into the program. It’s advisable to talk to your financial professional about ways that you can look into these options.
Final Thoughts About Retiring at 55
If you retire at age 55, the reality in today’s world is that you might live into your nineties or even longer. This wasn’t the case for previous generations, when workers retired and then usually passed in their 60s.
Retirement has now become one of the major phases of your life. Retiring at age 55 means that you will have fewer years to plan and save, and a longer period of time over which you must stretch your money. One way to head this off is to work with an experienced financial advisor, and together you can create a plan tailored to your goals and situation.
Being Flexible with Early Retirement
Be ready to make changes in your plans if necessary (such as if serious health problems arise for you and/or your spouse). Your financial plan may require some work in retirement for a period of time in order to generate additional income.
This is becoming an increasingly common strategy for many retirees. Many workers today have retired from their jobs and are supplementing their retirement income with earnings from a less-demanding job. Or you may want to start an entirely new career in another field if you retire from your current job at age 55.
Only you can determine the path that you want to take after you stop working. Just make sure that your retirement portfolio is built to withstand some bad weather and still stay on track.
Maximizing Income When Retiring at 55
Annuities can help you maximize your income while using less money, because of how much income they can pay you relative to other financial vehicles. This is due to how insurance companies pool their investment risk among many contract holders.
Your financial advisor can help you determine whether one or more of these is right for you. But regardless of which financial instruments you choose, retirement at age 55 is possible if you start planning early enough and invest prudently.
Are you looking for a financial professional to help you work through these important details and questions? Or perhaps you would like a second opinion of your current plan. For convenience, many experienced and independent financial professionals are available at SafeMoney.com to assist you.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.