Retiring at age 55 is nearly ideal. You’ve put plenty of time into a career, and you have numerous achievements and accolades under your belt. On the other hand, you’re still young enough to enjoy life. You can travel, engage in new hobbies, and visit friends and family, all without the health issues that can crop up as we age. But to retire at 55 takes some significant planning as well as healthy savings in investment accounts. How much savings is required to retire at age 55?
How Much Are Your Expenses in Retirement?
In order to know how much you need to save, the more important question is to determine how much you will spend in your retirement years. A lot will depend on what kind of lifestyle you envision in retirement. Are you picturing spending time exploring far-flung parts of the world, or just more time puttering around in the garden? You’ll need to answer these questions to figure out how much you need to budget.
In order to set a retirement budget, you’ll need to consider at least four factors:
- Healthcare costs
- Property taxes and home maintenance
- Hobbies and leisure
- Other ordinary expenses
Healthcare costs: You’re probably healthy now, but keep in mind that health care costs go up as people age. If you retire at 55, you’ll no longer be able to count on your employer’s health insurance and it will be another ten years before you qualify for Medicare. That’s ten years of health care costs you’ll need to pay for out of pocket. You need to plan for both healthcare insurance cost and deductibles you need to pay out of your pockets for healthcare.
Property taxes and home maintenance: Hopefully, you’ll have paid off your mortgage if you’re planning on retiring at 55. However, you’ll still need to pay property taxes and foot the bill for maintenance and repairs in your home. Also, remember property taxes go up over time, so budget for those increases.
Hobbies and leisure: You’re probably not planning an early retirement so you can spend more time watching TV. Now that you have more free time, you’ll be able to pursue hobbies you didn’t have time for when you were working, and most of those hobbies cost money. We’re not saying don’t have expensive hobbies, just be sure to plan for them financially.
Other ordinary expenses: Of course, you still need to pay for other ordinary expenses such as food, clothes, gas, car insurance, utilities, or just movie tickets. Depending on your lifestyles, these ordinary expenses can vary significantly. You know your lifestyle best, so budget accordingly.
>>MORE: How Much Income Tax Will You Have to Pay in Retirement? A Case Study
You can use the “How much are your monthly expenses in retirement” calculator below to estimate your monthly expenses:
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Now you know your expenses in retirement, let’s see what retirement incomes you can support these expenses
How Much Retirement Income Will You Have When You Retire?
Below are the potential sources of retirement income that you can tap to when retiring at age 55
- Social Security Benefits:
- Taxable Other Incomes such as rental income or part-time job
- Distribution or withdrawals from taxable or tax-deferral retirement and investment accounts such as 401K, IRA, or brokerage investment accounts at Vanguard or Charles Schwab
- Distribution or withdrawals from tax-free retirement accounts such as Roth IRA or Indexed Universal Life Insurance Policy (or IUL)
You can use the calculator below to estimate how much income you will have when you retire.
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Taxes: You’ll still need to pay taxes in retirement. If you have a retirement account, you won’t be able to draw from it without penalties until age 59 and a half. Once you start taking withdrawals, that money will be counted as income and taxed according to your current tax bracket. If you save enough money to retire at age 55, you may not qualify for Social Security benefits. Find your tax bracket and budget for taxes accordingly.
You could put money into a permanent life insurance policy with a cash value account attached. That would allow you to withdraw from the cash value account tax-free or take loans against it. Withdrawing against the cash value will reduce the death benefit, but you could supplement your retirement this way. It probably won’t be enough to allow you to retire at 55 on its own, though.
In addition, if you retire at 55 years old, you should know that withdrawing from social securities benefits and tax-deferred and tax-free retirement accounts such as 401K, IRA, Roth IRA accounts at this age might be penalized (usually at 10% of the withdrawal amount).
You may consider a Roth IRA Conversion Ladder to make sure you will be able to withdraw enough money from your retirement accounts before 59 1/2 years old without paying penalty.
>>MORE: Roth IRA: Everything You Need to Know
>>MORE: Backdoor Roth IRA: Step by Step Setup at Vanguard
Assuming that you know how much you need to withdraw from all of your retirement savings accounts at retirement age to support your expenses, let’s see how much your retirement portfolio’s total balance needs to be at your retirement age. You can use the calculator below to figure that out.
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Now you know how much total retirement savings you need to have at your retirement age, let’s figure out how much you will need to save now to be able to retire at 55 years old.
(another calculator will be inserted here) – I am still working on this calculator, but it is very similar to the below
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Now you know how much you need to save today to be able to retire comfortably at age 55, you can consider a few savings strategies to enable you to save enough for your retirement goals:
How old are you now?
Another factor is how old you are and when you started to save for retirement. If you are 25 right now, that gives you 30 years to plan out how to retire at 55. That’s should be enough time and will even allow for a few setbacks and mistakes. If you 45 when you decide you want to retire in ten years, you have a lot less leeway.
Either way, you’ll need significant savings if you’re planning to live off of your investment income when you retire. Keep in mind you won’t be able to tap into either an IRA or a Roth retirement account without penalties for another four and a half years. You will have to count on investment income alone.
There is a nifty retirement calculator here so you can put in your current age, your current income, and your desired retirement age and it will tell you how much you need to save in order to retire.
If the amount you need to start saving is more than your 401K and IRA maximum contributions, you may consider pursuing a mega backdoor Roth IRA. This strategy will allow you to save even more with your after-tax money and still benefit from tax-free withdrawal benefit of a Roth IRA account. Learn more about mega backdoor Roth IRA and step-by-step setup at Fidelity.
Invest Aggressively
You’ll need to invest in stocks and mutual funds if you want to retire early. If you’re young, there’s no reason not to invest in more aggressive funds, unless you’re really risk averse. But investing in the stock market over the long-term returns about 10% on your investment. You’ll need to depend on your stock market returns, plus the cash value on your life insurance in order to retire at 55.
Don’t panic if your investments lose money in certain years. Over the long term, they recoup their losses.
You should plan on living off about 10% of your investment accounts in retirement in order not to reduce the principal account.
Consider a side hustle
You probably don’t want to keep working at your current job, since you are dreaming of retiring at 55. However, now is the perfect time to pursue a second career or to begin making money off of a hobby. You could take a part-time job in a bookstore if you like to read, or a home and garden store if gardening is your thing.
You could turn your former profession into a freelance part-time job, such as by doing taxes on the side or offering consulting work. There are many advantages of working just part-time after retiring. People who work after retirement are often more active and socially connected.
So, how much money will I need, again?
If you’re looking for a ballpark figure to retire by 55, Money estimates you’ll need to replace 70-80% of your pre-retirement income to have a similar standard of living when you retire. You might be able to get by on less, though, because you won’t have to save a chunk of your income for retirement. They estimate that to retire at age 55, and to live on 60% of your pre-retirement income, you’ll need to save about 15 times your annual income.
Last Thoughts
Retiring at 55 is a lofty goal, but with some careful planning, it should be achievable.