How To Retire At 55: What It Takes To Live Worry-Free

There are no hard-and-fast rules concerning retirement age. Choosing to retire at 55 could be the smartest decision you ever make. It can also expose you to serious financial hardship if you aren’t really ready. If you’re anxious to get out, see the world, and indulge in an extended period of recreation while you’re still young enough to enjoy it, planning is essential. Read on to find out what it takes to live worry-free as an early retiree.

Start By Paying Off Your Debts And Avoiding New Ones

Even before you set a firm date for your retirement, there are several things that you can do to start getting ready. The first of these is to pay off all of your debts. Large, long-term loans place your personal assets in jeopardy. More importantly, the interest that you pay on these loans increases your living costs and diminishes your ability to implement an aggressive savings plan. 

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Open A Health Savings Account

Opening a health savings account today is a decision that you’ll thank yourself for long into the future. Although exiting the workforce at 55 means that you’ll likely start your retirement in excellent health, you have to account for the inevitability of age-related changes in your well-being. For many people, health savings accounts (HSAs) provide the perfect opportunity to bolster themselves against the unexpected health-wise. 

Offered as part of many top-tier, high-deductible health plans, HSAs:

  • Allow for tax-free contributions
  • Roll your contributions over from year-to-year
  • Roll your contributions over even if you change employers

The money that you contribute to your HSA will experience tax-deferred growth. It can also be used to cover qualifying health costs tax-free, and it can be used post-retirement. In fact, after the age of 65, you can use this money for any purpose. Although HSAs are a frequently overlooked tool in early retirement plans, they’re definitely worth investigation.

Draft A Detailed Personal Finance Plan

The ability to retire both comfortably and early starts with everything that you do right now. Although it helps to have a detailed list of do’s and don’ts when it comes to pre-retirement spending, it’s also important to have an itemized breakdown of where all your money is going. Drafting a detailed finance plan will help you prepare for unexpected expenses, identify areas of waste, better-manage your disposable income, and more. 

Diversify Your Income

There are multiple benefits in income diversification, even if you don’t plan on leaving the workforce early. With multiple streams of income, unexpected expenses, demotions, job loss, and other unplanned events won’t have a major impact on your life-quality or your ambitions. It’s also important to note that quality of life is often defined by a sense of purpose, feelings of accomplishment, and the ability to remain productive. Many people exit the workforce early only to find that they feel incredibly unfulfilled. Having rental properties, a gig, or a creative pursuit could provide a diverse range of both financial and mental health benefits.

a creative pursuit, like designing business cards online, could provide a diverse range of both financial and mental health benefits.

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Downsize And Tightly Control Your Expenses

Most successful, early retirees will tell you that making it out of the workforce before 60 and still managing to live a comfortable, high-quality life is largely about sacrifice. Not only does this mean putting more of your disposable income in savings and investments, but it also means paring down your living costs as much as possible. Now is the time to start looking for and leveraging money management tips that help you reduce your spending. 

If you’ve been taking big, annual vacations, consider putting these off until you’ve accomplished your goals and taking local or otherwise budget-friendly trips instead. If your kids have already left the nest, consider selling your home, renting it out, and moving into a more modest dwelling instead. Carefully review and refine your budget to limit all areas of excess and waste. The $6 that you’re spending each day on a specialty coffee each morning or on a deli sandwich at lunch can add up to $1,500 in savings each year. Packing your own lunch, brewing your own morning joe, and taking other steps to live frugally may be just as important to your post-retirement comfort as your investment decisions.

The Numbers

Early retirement is really a numbers game. You have to make sure that you have enough money to see you through your remaining years, and to account for rising inflation and rising costs of living. This also means:

  • Defining your expected life quality
  • Anticipating how many “healthy” years you’ll have post-retirement
  • Estimating your remaining lifespan with a fair amount of accuracy
  • Planning for your end-of-life expenses
  • Determining/defining your reliance on social security

Early Retirement And Its Impact On Social Security

Although there aren’t any hard-and-fast rules for retirement age, the Social Security Administration (SSA) defines the “normal retirement age” as 67. Moreover, to qualify for delayed retirement credits and achieve maximum social security benefits, a person would have to retire at 70. Retiring any time before the age of 67 will result in a reduction of benefits. For instance, retirement at 62 will result in an automatic reduction in benefits of 30 percent. If you retire at 55, not only will you have to wait another seven years before receiving these extra monies, but you’ll also face a benefits reduction of 5/9 of a percent for 36 months and 5/12 of a percent every month thereafter. Comparatively, retirement at 70 can leave you with up to 132 percent of your normal monthly benefit. Thus, it pays to either “hang in there” or make sure that social security isn’t critical to your financial wellness. 

Determine How Much Money You’ll Need

One common estimate for post-retirement costs (if you want to live a comfortable, worry-free life) is that you’ll need to have about 75 percent of your pre-retirement income. Thus, if you make $150,000 a year now, you’ll need about $112,500 after you leave your job. Keep in mind, the more that you reduce your living expenses now, the easier it will be to save and the more likely you are to need less than what you’ve saved up. At 55, you can expect to have about 20 to 30 years ahead of you.

Overshooting your goals and spending less than you’ve set aside can definitely come in handy if you live longer than you initially expected or if your end-of-life care winds up costing more than the average. 

The Contributions You Need To Start Making Now

The three most popular investment methods for early retirement are:

  • Annuities
  • IRAs
  • 401ks

With the ambitious goal of leaving the workforce behind you at 55, you need to start maxing out your contributions in each of these areas as soon as you can. Maxing out your retirement accounts by contributing the maximum amount annually will allow you to reap the greatest rewards from compound interest

In 2022, those 50 or older can contribute up to $7k annually across all of their IRAs, while those below 50 can contribute just $6k. However, the 2023 maximum 401k contribution is $22,500 and thus, this is where you want to make sure that you’re hitting the limits. With employer contributions, this manner of aggressive savings will combine with your other efforts to help you reach your goals. 

You can work with a financial advisor to make annuities a cornerstone of your early retirement plan by accounting for your past and current IRA and 401k contributions, your passive and other secondary income, and your current and post-retirement budget.

Retiring at 55 doesn’t have to be a pipe dream. Best of all, you can do it comfortably. With self-discipline and the tips above, you can exit the workforce while you’re still young and healthy enough to enjoy your free time.