Retire At 55? Maybe. If You’re Up for a Challenge
Posted in: Early Retirement
Published: February 1, 2019
It’s you’re 25 years old and contemplating retirement 30 years hence, an age 55 retirement is a possibility – if you start planning now. Put away at least $350 per month and plan on increasing that amount of savings each year.
If you’re approaching age 40 (or older) and you’d like to retire by 55, it may be a bit more challenging, although in many cases it is still possible – if you’re willing to commit to the changes needed to make it happen.
Of course, there is a third option that doesn’t get considered as often as it should. Find work you love, so work doesn’t feel like work. Granted, that is not really “retirement,” but who cares, if you’re happy?
Let’s explore these options; both the financial part (how much does it take) and the soul-searching part (what will make you happy).
The Financial Side
We’re living longer than our grandparents and parents. If you retire at 55, assuming you have an average life expectancy, your assets must produce income for you to live on for a longer period than someone who retires later. The Social Security Administration provides a handy tool to guesstimate your life expectancy (mine is 85.4). But that is just a starting place of statistics that include the entire population. White collar, college-educated folks have longer life expectancies than average. That means I can easily add four to five years to that estimate.
Knowing your statistical life expectancy, based on your gender and birth date, can help you estimate how much you will need in retirement. Start by making a projection of what you think you will spend each year (remember to account for inflation). Then, compare that to the sources of retirement income you’ll have available to you (such as Social Security, rental income or pensions). Calculate the difference between what’s going out and what’s coming in from non-financial sources to see how much you’ll have to withdraw from savings each year.
If you’re willing to develop a low-cost lifestyle, such as the RV lifestyle, or living overseas, you can make your money stretch. This lower-cost lifestyle may not have to be permanent. Meaning you could have a less expensive lifestyle from age 55 to 65, then at 66 plan to settle down in a house with a more traditional lifestyle again. These varying expenses can be projected in a retirement income plan so you can see how you would pay for things in which phases of retirement.
Social Security/IRAs (snapshot). Social Security doesn’t start until age sixty-two, at the earliest. And, in most cases, it is difficult to access retirement account money before age 59½ without paying penalties, although there are ways to do it. This means if you retire at fifty-five, you will probably need other sources of money you can tap into, at least for a few years. One option: you might consider using 72(t) payments to withdraw from an IRA at an early age. A 72(t) payment allows you to take money out of an IRA before age 59 ½ and avoid the 10% early withdrawal penalty tax. And even though you can start Social Security at 62, there are many reasons you might consider starting to withdraw benefits at a later age. The longer you wait (the maximum is age 70), the higher your monthly benefit will be.
Healthcare insurance costs. I know plenty of folks in their mid to late 50s who are, given the state of flux of the healthcare marketplace, eagerly eyeing Medicare. Coverage doesn’t begin until age sixty-five. If you are planning to retire at 55, make sure you will have a secure source of health insurance coverage that provides for you until you become eligible for Medicare. With the high deductible plans most of us now have, it may seem that your premiums are sky-high, even if you have health coverage through your employer. But your employer may be subsidizing 75% or more of the cost of health insurance (In 2001, 34% of Fortune’s 100 Best Companies to Work for paid 100% of employee premiums. Hard to imagine in this day and age). Many early-retiree-hopefuls are shocked at the cost of purchasing their coverage. Coverage, if you’re between the ages of 55 and 65, can be expensive, in the approximate range of $400 to $1,000 a month depending on the type of plan you choose. If you can qualify for a health care tax credit by keeping your Adjusted Gross Income low, that can help reduce your premiums until you reach Medicare coverage.
And health care tax credits are not just for lower net worth households – in many cases qualifying for a tax credit is about planning. We’ve had many households with financial assets north of a million who qualified for the health care tax credit because we were able to carefully plan which accounts they draw from in order to keep their income at the required qualifying-levels. In one case this reduced a couple’s premiums by over $20,000 in a single tax year.
Again, as with your retirement income projections, plan ahead and estimate how much purchasing your healthcare insurance will cost as you weigh the pros and cons of retiring early.
The Soul-Searching Side
Fifty percent of U.S. workers are dissatisfied with their current job (another way to look at this is 50% of workers are satisfied with their jobs—yay!). If you don’t like your job, you probably picture retirement as an escape hatch from the drudgery of a situation you feel trapped in. I’m a firm believer that what we pay attention to grows and magnifies in your life. If you focus on all the things you don’t like then those undesirable characteristics begin to loom larger than life. Now, I’m not saying the right thing to do is spend 40 hours a week in an unhealthy job situation or in a place that doesn’t suit your talents. What I am saying is, if you’re miserable, explore other options. Retirement isn’t the only solution to work you don’t enjoy.
In studying early retirement examples, I read this great Forbes article on a woman who worked as a high paid attorney, saved a ton, and retired in her 30’s to travel the world. I admire her commitment to this goal, and, at the same time, I knew that plan had no appeal to me. The woman said, “The law firm wasn’t paying me because I knew things. They were paying me for my life. I felt pressured to put work above family, friends, sleep, vacations, and everything else. At the time, I thought I was getting the better end of the deal — $160k for a year of my life? Heck, yeah! Now, I realize I only have one life, and I’ll never get it back.” I agree with that! But my solution has been to find work I love. Work I’m passionate about. Work that doesn’t feel like work. Then I can have a more balanced life, enjoy travel along the way, and extend my career to at least my late 60’s or into my 70’s.
Moreover, while sleeping in every day sounds nice, many find the post-work experience not as fulfilling as they thought it would be. In reality, retirement is not an extended vacation, especially if financial circumstances require you to curb your lifestyle. If you are hell bent on retiring early but don’t have the resources to travel, golf, take classes, etc., you may soon regret your decision.
When thinking about early retirement, give careful thought as to what you want to do with your time and your money. If you’re not the leisurely sort, you might consider starting a small business. According to the Kauffman Index, in 2014 about 1/4 of all start-ups were entrepreneurs in the age 55 – 65 range. You could also use your prior experience to start a consulting business or turn a prior hobby into a money-making activity.
If you can see yourself living in a third world country or buying an inexpensive RV and traveling from campground to campground, or you’ve managed to save a ton, then an age 55 retirement may work just fine.
To help you with your soul-searching, I’d highly recommend you read the blog series How to Move Your Retirement From Good to Great. The concepts in the article don’t just apply to retirement. They apply to life. With some soul searching you can find numerous ways to move your working life from good to great too.
Why Retiring Later Might Be Better
I’m sure you’ve heard about or read books by the dozens, of so-called early retirees who have made a cottage industry out of retiring early (somewhat of an oxymoron). My favorite early retirement site is Early Retirement Extreme.
There are pearls of wisdom within each of their models. However, they all made major adjustments in their lives and lifestyles to retire early, and I applaud them for doing so. They are outliers, however. Most aren’t willing to make those adjustments.
As an alternative, adding 10+ years to your work life may not sound like fun, but it can mean a comfortable life along the way, and in retirement. When it comes to Social Security, for most folks, working longer means you’ll increase your full benefit amount. Social Security benefits are based on your top 35 years of earnings. If your last few years of income are greater than some of your earlier years, you’ll reap greater rewards by working longer.
Health care costs are also a good reason to extend your working years. No one will be surprised with the results of a recent USB Survey that found that close to 75 percent of investors said that “getting sick is their greatest retirement fear.” Moreover, retirees tend to underestimate health care costs. While it’s impossible to predict what your health care costs in retirement will be, Fidelity’s Retiree Health Care Cost Estimate revealed that “a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs in retirement.” This does not include long-term care costs.
The big number sounds scary, but when you break it out over 30 years, that’s about $8,666 a year. You must plan for this. If you want to retire at 55, that’s another ten years of health care costs, or $86,000, to add on to the $260k.
Once you consider both the financial and the soul-searching side, when it comes to retirement, age is not the question. Instead of asking, “Can I retire at 55,” ask, “How can I design a life, and an eventual retirement, that will be comfortable and full of joy.”
To learn how to lay out a step-by-step plan for your own transition into retirement, read the 5-star rated book, Control Your Retirement Destiny by retirement expert Dana Anspach, who is also Sensible Money’s Founder & CEO, and the author of this article.