If you're considering retiring early, you've probably thought about what age that can realistically happen. Is it 60, 57, or maybe 55?
Early retirement 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.
Early retirement challenges
For some, 55 is too early to retire. You may have more to give to your job, more to accomplish, or insufficient savings. However, if you've been growing your savings and can manage living expenses with minimal stress on your budget, retiring at 55 is possible.
Mountain America Credit Union offers these considerations:
1. Fill the income gap. Because penalty-free withdrawals from your IRA don't start until age 59 1/2 and Social Security is off-limits until age 62, you'll need to generate income. If you don't have cash that's easily accessible, you may want to wait a little longer to retire. 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 more extensive check.
2. Know the rules. There are a few ways to access funds from your IRA or 401(k) before age 59 1/2 without the 10% penalty. These options come with strict rules, so review them with a financial professional.
o The rule of 55—If you get fired, laid off, or quit your job the same year you turn 55, you can withdraw money from your 401(k) without a penalty, but this only applies to the 401(k) associated with the employer you recently left.
o IRAs—With a Roth IRA, you can withdraw your original contributions tax and penalty-free. The account must be open for at least five years before any withdrawal. If you have a traditional IRA, certain exceptions allow penalty-free withdrawals before you hit the 59 mark, like being called to active duty or becoming permanently disabled and can no longer work.
o 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 five years or until you turn 59 1/2.
3. Healthcare plan.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.
Other options include:
- COBRA coverage—These plans usually last for 18 months for early retirees, which is not ideal because you'll need coverage for ten years until Medicare kicks in. However, you'll get to keep your current insurance.
- 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 offers a significantly less comprehensive range compared to marketplace plans.
To retire at 55, you'll need savings and investments outside of your retirement accounts that can sustain your lifestyle until you can access that money with minimal impact on your bottom line.
Consider these options:
- Build a regular savings or money market account before your early retirement date. Doing so 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.
So, whether you want to retire early, later, or right on time, Mountain America can help guide you toward the lifestyle you want.
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