Can You Retire at Age 55? Let’s Run the Numbers

Early Retirement Challenges

Whereas there’s analysis to point out that working longer retains you more healthy and happier, there’s additionally proof for the opposing view.

The National Bureau of Economic Research discovered that “retirement improves each well being and life satisfaction,” partly by factoring within the variety of people who find themselves compelled to retire as a consequence of well being points.

Learn Extra: How the COVID-19 Pandemic is Reshaping Retirement

Nevertheless, the first problem is making certain that you’ve sufficient belongings to supply an appropriate degree of earnings all through your remaining years, so that you’re financially able to dwell with out a paycheck.

The average lifespan within the U.S. is just below 79 years. For somebody who retires at 55, this implies they should save up no less than 24 years’ value of earnings, and even more healthy people who dwell past the age of 79 might want to have a fair bigger nest egg.

Learn Extra: 5 Steps to Retiring Early

How ready are you? See the way you examine to your friends with this free 401k calculator.


Keep away from outliving your cash

No matter your age whenever you determine to retire, you don’t wish to fear about outliving your cash. Fortunately, there are methods to assist keep away from it.

  1. Save extra now. If it’s essential to preserve working since you will not have sufficient saved, take steps now to extend your financial savings. Contribute the utmost to your employer’s retirement plan and to any particular person retirement accounts (IRAs).
  2. Wait a little bit longer to gather Social Safety advantages. For yearly you wait previous your full retirement age to elect advantages, you earn delayed retirement credit. The credit can improve your month-to-month profit by about 8% per yr, as much as age 70.
  3. Restrict your retirement spending. Many monetary professionals advocate that you simply faucet not more than 4% to five% (adjusted yearly for inflation) of your nest egg every year, to assist make your cash final.

How Social Safety Impacts Early Retirement

The Social Safety Administration (SSA) makes use of your beginning yr to find out what it calls your “full retirement age.” In different phrases, the definition of early retirement depends upon whenever you had been born.

One quirk to this technique is that these born on January 1 are counted as a part of the earlier yr. So, when you had been born on January 1, 1960, you must discuss with the total retirement age for these born in 1959.

Examine the chart under for a full checklist of ordinary, or "full," retirement years by beginning yr.

Full Retirement Age by Delivery 12 months (as of Might 27, 2020) Delivery 12 months Full Retirement Age 1937 or earlier 65 1938 65 and two months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and eight months 1942 65 and 10 months 1943–1954 66 1955 66 and two months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and eight months 1959 66 and 10 months 1960 or later 67

SSA refers to the usual retirement age as “full retirement age,” as a result of that’s the age at which you obtain your full quantity of advantages. The advantages will probably be decreased by a sure share, relying on how early you start taking your advantages. You possibly can retire earlier, however you’ll obtain a reduced benefit. The earliest you may obtain any quantity is 62, irrespective of your beginning yr.

However, you may delay receiving Social Safety advantages—even after you've retired—and obtain enhanced advantages. You possibly can proceed to reinforce your advantages by delaying Social Safety till age 70 (delaying past age 70 gained't improve your advantages). As with profit reductions, the quantity your delayed advantages will improve depends upon your beginning yr.

To delay your Social Safety advantages, you would want to make use of your individual belongings for earnings within the meantime. With cautious planning, this technique can get you considerably extra lifetime earnings than taking advantages early.

Do not underestimate how lengthy you may dwell

Persons are dwelling longer. This implies your retirement financial savings need to final you longer.

Listed here are some statistics in keeping with information from J.P. Morgan:

  • A 62-year-old man has a 61% chance of dwelling till 80 and practically a one in 4 likelihood of dwelling till age 90
  • A 62-year-old feminine has a 71% chance of dwelling till 80 and one in three odds of dwelling till 90
  • As a pair, there’s an 89% likelihood no less than one partner will dwell till 80 and nearly a 50% chance that one individual will dwell till 90 

Put one other means, the percentages of both you or your partner dwelling previous 90 are roughly 50/50. In the event you retire at 55, you may in all probability spend extra time in retirement than you probably did working. It sounds good, however affording it requires a number of planning and a disciplined strategy to saving and investing. 

How Your Financial savings Impacts Early Retirement

When you’ve got enough financial savings, retiring early could also be extra achievable than you suppose. Why? Many individuals assume their retirement cash is off-limits till they attain age 59½, however a particular rule in most 401k plans permits penalty-free withdrawals from age 55 – 59½ — however provided that you retire after your fifty fifth birthday.

In the event you nonetheless have cash in your 401k plan from a former employer, and assuming you weren’t no less than age 55 whenever you left that employer, you’ll have to attend till age 59½ to start out taking withdrawals with out penalty.

Moreover, you probably have outdated 401ks rolled into your present 401k earlier than you retire out of your present job, you’ll have entry to those funds penalty free whenever you retire out of your present job.

As you save for retirement, it’s vital to diversify your financial savings. Most individuals give attention to filling up their 401k bucket, however bear in mind you don’t wish to neglect taxable or Roth (when potential) financial savings. Placing cash in numerous account sorts (pre-tax, taxable, post-tax) may help you retire earlier than age 59½. It’ll additionally provide flexibility and potential tax savings when you could be strategic in regards to the account sorts you withdraw from in retirement.

Learn Extra: Types of Retirement Plans for Individuals

How A lot Can You Make on Social Safety?

How a lot you may earn whenever you retire depends upon your age. Social Safety has totally different guidelines for:

  • earlier than the yr you flip full retirement age
  • through the yr you flip full retirement age, and
  • after you attain full retirement age.

Till you attain full retirement age, the Social Safety Administration (SSA) will subtract cash out of your retirement test when you exceed a specific amount of earned earnings for the yr. This penalty limits the quantity you may earn whenever you retire (and nonetheless have or not it’s worthwhile to work). For the yr 2022, the utmost earnings you may earn after retirement is $19,560 ($1,630 per 30 days), with out having your advantages decreased. The quantity goes up every year. The utmost earnings restrict does not change relying in your age; in different phrases, it is the identical whether or not you are 62, 63, or 64.

In the event you’re amassing Social Safety retirement advantages earlier than full retirement age and also you make greater than this quantity, Social Safety will cut back your advantages by $1 for each $2 you earn over the restrict. When you attain full retirement age, you may make any amount of cash and nonetheless obtain your full Social Safety retirement profit.

The way in which Social Safety reduces your advantages is definitely very difficult. Social Safety does not cut back every month-to-month test by a small quantity. That might be too easy. As an alternative, the company will withhold a number of months’ total checks till the discount is paid off. (For the main points, learn Social Safety’s pamphlet on “How Work Affects Your Benefits.” You can too use Social Security’s earnings test calculator to see how a lot your discount will probably be and when Social Safety will withhold your advantages.)

Observe that when you’re working and also you lose your job, it’s possible you’ll acquire unemployment advantages (assuming you in any other case qualify for them) despite the fact that you might be additionally amassing your Social Security retirement benefits.

To retire at 55, you may need financial savings outdoors of retirement accounts

Most individuals need extra management over their day-to-day after they retire, not much less. The considered having restricted entry to your individual retirement financial savings might be lower than very best. However nobody mentioned retiring early at 55 was straightforward, proper?

You may usually have the very best alternative to dwell the approach to life you need in retirement and retire early you probably have investment assets outside of your retirement accounts. A taxable brokerage account is probably the most versatile sort of funding account. There is no such thing as a contribution restrict or guidelines about when you may promote funds and withdraw the money. In trade for this limitless flexibility, you sacrifice the tax-deferred development and tax deduction you obtain with 401(ok) or 403(b) contributions. 

However that is to not say a brokerage account is tax inenvironment friendly, both. Lengthy-term capital positive aspects tax charges are way more favorable than 401(ok) or IRA withdrawals that are taxed as atypical earnings. In truth, a married couple submitting collectively with earnings below $80,000 in 2020 would pay a 0% tax rate on long-term capital gains

At What Age Is Early Retirement?

Leaving the workforce earlier than the normal age of 65 is usually thought of early retirement.

You can begin amassing Social Safety retirement advantages as early as age 62, however you gained’t obtain your full advantages. For anybody born between 1943 and 1954, for instance, full advantages don’t kick in till age 66, and for these born after that, full-benefit age is a little bit older.

How Do You Report Earnings Throughout Early Retirement?

The SSA bases its retirement profit calculations on earnings reported on W-2 varieties and on self-employment tax funds. Most people aren’t required to ship in an estimate of earnings.

However Social Safety does request earnings estimates from some recipients: these with substantial self-employment income or these whose reported earnings have diversified broadly from month to month, together with individuals who work on fee. Towards the tip of every yr, Social Safety sends these individuals a kind asking for an earnings estimate for the next yr. The company makes use of the data to calculate advantages for the primary months of the next yr. The SSA will then alter the quantities, if mandatory, after it receives precise W-2 or self-employment tax data within the present yr.

As soon as retirees attain full retirement age, Social Safety will now not test their earnings. As a result of there isn’t any Social Safety restrict on how a lot an individual can earn after reaching full retirement age, there’s nothing to report.

What age is taken into account early retirement for girls?

Ladies could need to work longer than males to fund a snug retirement, in keeping with the U.S. Division of Labor. They might contribute much less to Social Safety, as a result of they're extra prone to work half time and take prolonged breaks from working with a purpose to cope with household tasks. They're additionally much less prone to have entry to employer-sponsored retirement plans.

The Backside Line

Many older individuals cannot watch for the day once they lastly name it quits on their careers and retire. Nonetheless, consistently worrying about funds is not precisely the way in which to spend your later years. That’s the reason it is important to consider when you should actually retire somewhat than specializing in the age at which you might be eligible to gather retirement advantages. Earlier than deciding, be sure to have the sources to benefit from this new stage of life.


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