Content of the material
- Early Retirement Challenges
- Avoid outliving your money
- How Social Security Affects Early Retirement
- Don’t underestimate how long you’ll live
- How Your Savings Affects Early Retirement
- How Much Can You Make on Social Security?
- To retire at 55, you’ll want savings outside of retirement accounts
- At What Age Is Early Retirement?
- How Do You Report Earnings During Early Retirement?
- What age is considered early retirement for women?
- The Bottom Line
Early Retirement Challenges
While there is research to show that working longer keeps you healthier and happier, there’s also evidence for the opposing view.
The National Bureau of Economic Research found that “retirement improves both health and life satisfaction,” in part by factoring in the number of people who are forced to retire due to health issues.
However, the primary challenge is ensuring that you have enough assets to provide an acceptable level of income throughout your remaining years, so you’re financially ready to live without a paycheck.
The average lifespan in the U.S. is just under 79 years. For someone who retires at 55, this means they need to save up at least 24 years’ worth of income, and even healthier individuals who live beyond the age of 79 will need to have an even larger nest egg.
Read More: 5 Steps to Retiring Early
How prepared are you? See how you compare to your peers with this free 401k calculator.
Avoid outliving your money
Whatever your age when you decide to retire, you don’t want to worry about outliving your money. Luckily, there are ways to help avoid it.
- Save more now. If you need to keep working because you won’t have enough saved, take steps now to increase your savings. Contribute the maximum to your employer’s retirement plan and to any individual retirement accounts (IRAs).
- Wait a little longer to collect Social Security benefits. For every year you wait past your full retirement age to elect benefits, you earn delayed retirement credits. The credits can increase your monthly benefit by about 8% per year, up to age 70.
- Limit your retirement spending. Many financial professionals recommend that you tap no more than 4% to 5% (adjusted annually for inflation) of your nest egg each year, to help make your money last.
How Social Security Affects Early Retirement
The Social Security Administration (SSA) uses your birth year to determine what it calls your “full retirement age.” In other words, the definition of early retirement depends on when you were born.
One quirk to this system is that those born on January 1 are counted as part of the previous year. So, if you were born on January 1, 1960, you should refer to the full retirement age for those born in 1959.
Check the chart below for a full list of standard, or "full," retirement years by birth year.
SSA refers to the standard retirement age as “full retirement age,” because that is the age at which you receive your full amount of benefits. The benefits will be reduced by a certain percentage, depending on how early you begin taking your benefits. You can retire earlier, but you will receive a reduced benefit. The earliest you can receive any amount is 62, no matter your birth year.
On the other hand, you can delay receiving Social Security benefits—even after you've retired—and receive enhanced benefits. You can continue to enhance your benefits by delaying Social Security until age 70 (delaying beyond age 70 won't enhance your benefits). As with benefit reductions, the amount your delayed benefits will increase depends on your birth year.
To delay your Social Security benefits, you would need to use your own assets for income in the meantime. With careful planning, this strategy can get you substantially more lifetime income than taking benefits early.
Don’t underestimate how long you’ll live
People are living longer. This means your retirement savings have to last you longer.
Here are some statistics according to data from J.P. Morgan:
- A 62-year-old man has a 61% probability of living until 80 and nearly a one in four chance of living until age 90
- A 62-year-old female has a 71% probability of living until 80 and one in three odds of living until 90
- As a couple, there’s an 89% chance at least one spouse will live until 80 and almost a 50% probability that one person will live until 90
Put another way, the odds of either you or your spouse living past 90 are roughly 50/50. If you retire at 55, you’ll probably spend more time in retirement than you did working. It sounds nice, but affording it requires lots of planning and a disciplined approach to saving and investing.
How Your Savings Affects Early Retirement
If you have sufficient savings, retiring early may be more achievable than you think. Why? Many people assume their retirement money is off-limits until they reach age 59½, but a special rule in most 401k plans allows penalty-free withdrawals from age 55 – 59½ — but only if you retire after your 55th birthday.
If you still have money in your 401k plan from a former employer, and assuming you weren’t at least age 55 when you left that employer, you’ll have to wait until age 59½ to start taking withdrawals without penalty.
Additionally, if you have old 401ks rolled into your current 401k before you retire from your current job, you will have access to these funds penalty free when you retire from your current job.
As you save for retirement, it’s important to diversify your savings. Most people focus on filling up their 401k bucket, but remember you don’t want to neglect taxable or Roth (when possible) savings. Putting money in different account types (pre-tax, taxable, post-tax) can help you retire before age 59½. It will also offer flexibility and possible tax savings if you can be strategic about the account types you withdraw from in retirement.
Read More: Types of Retirement Plans for Individuals
How Much Can You Make on Social Security?
How much you can earn when you retire depends on your age. Social Security has different rules for:
- before the year you turn full retirement age
- during the year you turn full retirement age, and
- after you reach full retirement age.
Until you reach full retirement age, the Social Security Administration (SSA) will subtract money from your retirement check if you exceed a certain amount of earned income for the year. This penalty limits the amount you can earn when you retire (and still have it be worthwhile to work). For the year 2022, the maximum income you can earn after retirement is $19,560 ($1,630 per month), without having your benefits reduced. The amount goes up each year. The maximum income limit doesn’t change depending on your age; in other words, it’s the same whether you’re 62, 63, or 64.
If you’re collecting Social Security retirement benefits before full retirement age and you make more than this amount, Social Security will reduce your benefits by $1 for every $2 you earn over the limit. Once you reach full retirement age, you can make any amount of money and still receive your full Social Security retirement benefit.
The way Social Security reduces your benefits is actually very complicated. Social Security doesn’t reduce each monthly check by a small amount. That would be too simple. Instead, the agency will withhold several months’ entire checks until the reduction is paid off. (For the details, read Social Security’s pamphlet on “How Work Affects Your Benefits.” You can also use Social Security’s earnings test calculator to see how much your reduction will be and when Social Security will withhold your benefits.)
Note that if you’re working and you lose your job, you may collect unemployment benefits (assuming you otherwise qualify for them) even though you are also collecting your Social Security retirement benefits.
To retire at 55, you’ll want savings outside of retirement accounts
Most people want more control over their day-to-day after they retire, not less. The thought of having restricted access to your own retirement savings is probably less than ideal. But no one said retiring early at 55 was easy, right?
You’ll generally have the best opportunity to live the lifestyle you want in retirement and retire early if you have investment assets outside of your retirement accounts. A taxable brokerage account is the most flexible type of investment account. There is no contribution limit or rules about when you can sell funds and withdraw the cash. In exchange for this unlimited flexibility, you sacrifice the tax-deferred growth and tax deduction you receive with 401(k) or 403(b) contributions.
But that’s not to say a brokerage account is tax inefficient, either. Long-term capital gains tax rates are much more favorable than 401(k) or IRA withdrawals which are taxed as ordinary income. In fact, a married couple filing jointly with income under $80,000 in 2020 would pay a 0% tax rate on long-term capital gains!
At What Age Is Early Retirement?
Leaving the workforce before the traditional age of 65 is typically considered early retirement.
You can start collecting Social Security retirement benefits as early as age 62, but you won’t receive your full benefits. For anyone born between 1943 and 1954, for example, full benefits don’t kick in until age 66, and for those born after that, full-benefit age is a little older.
How Do You Report Earnings During Early Retirement?
The SSA bases its retirement benefit calculations on earnings reported on W-2 forms and on self-employment tax payments. Most individuals are not required to send in an estimate of earnings.
But Social Security does request earnings estimates from some recipients: those with substantial self-employment income or those whose reported earnings have varied widely from month to month, including people who work on commission. Toward the end of each year, Social Security sends these people a form asking for an earnings estimate for the following year. The agency uses the information to calculate benefits for the first months of the following year. The SSA will then adjust the amounts, if necessary, after it receives actual W-2 or self-employment tax information in the current year.
Once retirees reach full retirement age, Social Security will no longer check their income. Because there is no Social Security limit on how much a person can earn after reaching full retirement age, there is nothing to report.
What age is considered early retirement for women?
Women may have to work longer than men to fund a comfortable retirement, according to the U.S. Department of Labor. They may contribute less to Social Security, because they're more likely to work part time and take extended breaks from working in order to deal with family responsibilities. They're also less likely to have access to employer-sponsored retirement plans.
The Bottom Line
Many older people can’t wait for the day when they finally call it quits on their careers and retire. Still, constantly worrying about finances isn’t exactly the way to spend your later years. That is why it’s important to consider when you should actually retire rather than focusing on the age at which you are eligible to collect retirement benefits. Before deciding, make sure you have the resources to make the most of this new stage of life.