Is 55 Too Early to Retire?

If you’re considering retiring early, you’ve probably thought about the age at which that can realistically happen—is it 60? 57? Maybe 55?

Retiring early requires more than just the desire and a robust retirement account balance. Starting your post-work life at age 55 is possible, but you’ll need a solid financial foundation in place first.

Early retirement challenges

For some people, 55 is too early to retire—they may have more to give to their job, more to accomplish or, frankly, not enough savings. However, if you’ve been diligently growing your savings and can manage your living expenses with minimal stress on your budget, retiring at 55 could be a reality.

As you begin your planning, consider these three challenges:

1. Fill the income gap. Because penalty-free withdrawals from your IRA don’t start until age 59 ½ and Social Security is off limits until age 62, you’ll need a way to generate income until then. If you don’t have cash that’s easily accessible, you may want to wait a little longer to retire. Something else to plan for—you don’t get full Social Security benefits until you turn 67, so you’ll need to decide if you want to receive a reduced benefit before then or hold out for the larger check.
    

2. Know the rules. There are a few ways to access funds from your IRA or 401(k) before age 59 ½ without being assessed the 10% penalty. These options come with strict rules, so be sure to review them with a financial professional before you utilize them.

   • The rule of 55—If you get fired, laid off or quit your job in the year you turn 55, you can withdraw money from your 401(k) without a penalty. This only applies to the 401(k) associated with the employer you most recently left.
      

   • IRAs—With a Roth IRA, you can always withdraw your original contributions tax- and penalty-free. The account must have been open for at least five years prior to any withdrawal. If you have a traditional IRA, there are certain exceptions that will allow penalty-free withdrawals before you hit the 59 ½ mark—for example, you are called to active duty or you become permanently disabled and can no longer work.
      

   • Rule 72(t)—If none of the approved exceptions apply to you, this part of the IRS Code lets you establish a schedule of annual (or more frequent) withdrawals from your retirement account called substantially equal periodic payments. These payments are made over the course of five years or until you turn 59 ½, whichever is longer.
      

3. Plan for healthcare. Medicare can pay for certain healthcare expenses in retirement, but coverage doesn’t begin until age 65 and individual health insurance plans can be expensive. The best-case scenario would be to get coverage under a spouse’s health insurance plan if they are still working.

Outside of that, here are some options:

• COBRA coverage—For early retirees, these plans usually last for 18 months, which is not ideal because you’ll need to be covered for 10 years until Medicare kicks in. However, you’ll get to keep your current insurance, so you won’t have to worry about shopping around.
   

• Public marketplace—These plans are typically more affordable than private insurance plans, but still expensive. Costs vary widely by state, so be sure to do your research.
   

• Short-term plans—This insurance coverage is cheaper, but the plans typically offer significantly less comprehensive coverage when compared to the marketplace plans.

Other options for income in retirement

To retire at 55, one thing is for sure—you’ll need to have savings and investments outside of your retirement accounts that can sustain your lifestyle until you can access that money with minimal impact to your bottom line.

Three options to consider are:

• Build up a regular savings or money market account before your early retirement date. This will provide funds until you can access your retirement accounts and Social Security.
   

• Open an online brokerage account. Remember, if you sell investments for a profit, it may trigger a capital gains tax.
   

• Invest in an annuity. Annuities can provide a steady stream of income in early retirement. These insurance contracts are designed to pay out invested funds for a specified amount of time in the future.

Plan, plan and plan some more

Retiring at any age requires a solid financial plan. Retiring early needs even more planning as the traditional sources of income aren’t available and new challenges, like healthcare, come into focus.

Here are some helpful financial planning tips:

1. Take a realistic look at your future expenses. It can be difficult to estimate your future spending needs. Keep in mind that what you’re going to spend drives how much you’ll need to save.
    

2. Don’t underestimate how long you’ll live. It’s a fact—people are living longer. Put simply, most research says the chances of either you or your spouse living past the age of 90 is 50/50.
    

3. Give your plan a test drive. You’ve done your calculations and planning, and you think you have a pretty solid retirement strategy. Now try living with it for a month or two. This is a great way to uncover issues or holes that can be fixed before you actually retire.
    

4. Lean on your financial advisor. No matter how much money you make or how early you want to retire, the guidance of a financial advisor can be priceless. Start with an initial meeting to explain what you want to do. Continue with monthly meetings until you have a good plan hashed out. Then, meet annually—before and after retirement—to make any adjustments as life goes on.

So, whether you want to retire early, later or right on time, Mountain America Credit Union can help you put a plan together to give you the lifestyle you want. Schedule a free consultation today!