Having the option to take an early retirement is a really nice thing to have. But how much money do you need to retire at 55? If you want to retire early, you’ll need a solid plan, control over your expenses, and savings outside of retirement accounts. Here’s how to find out if you can retire early.
How To Retire Early
Whether you’ve been diligently saving or recently experienced a sudden liquidity event, you may wonder if you can retire now. Perhaps unsurprisingly, your retirement age is a key part of your retirement-readiness.
But in determining whether retiring at 55 can be a reality, many investors are surprised that their retirement expenses are the most important factor, not investment account balances.
In working with your financial advisor, also discuss your life expectancy, risk-adjusted investment strategy, and other options to supplement income, perhaps through consulting work.
Key Steps To Retire At 55
- Structuring withdrawals from retirement accounts before age 59 1/2 without a penalty
- Understanding Social Security benefit calculations
- Covering healthcare expenses before Medicare
- Supplementing retirement income with a brokerage account
- Projecting how much money you need to retire at 55
Planning to Retire Early? Now You Need to Figure Out What to Do Next
Navigating Early Withdrawal Penalties Before Age 59 1/2
Generally, penalty-free withdrawals from IRAs and retirement accounts are not available until age 59 1/2. Taking an early retirement is not one of the exceptions to the 10% early withdrawal penalty.
So you may be wondering: how can I retire at 55 if I can’t access my retirement account?
Well, the good news is there are a few ways. But remember, just because you can doesn’t mean you should. Work with your financial advisor to discuss your situation.
Traditional IRAs
Tapping an IRA early is possible using the substantially equal periodic payment (SEPP) method. At a high level, you have the choice of one of three IRS-approved distribution methods. Your required withdrawal is calculated according to the method you selected. You don’t get to decide how much you want to take out and when.
Payments must continue for at least five years or until you turn 59 1/2, whichever is longer. If you start a SEPP program at age 55, you’ll be able to stop at 60. Failure to follow the SEPP rules will trigger penalties and interest. Distributions from a pre-tax IRA are taxable as ordinary income.
401(k)s
In addition to the SEPP method above, some 401(k) plans may have another option for individuals who retire between age 55 and 59 1/2. The rule of 55 allows individuals who retire at (or after) 55 to withdraw retirement funds from that 401(k) without penalties.
There is no 10% penalty, but there is a mandatory 20% federal income tax withholding. Also, 401(k) and 403(b) plans aren’t required to offer this provision, so you’ll want to review your plan documents.
Roth IRAs
If you have a Roth IRA, you can withdraw your own original contributions (but not growth and earnings) tax and penalty-free. After you reach age 59 1/2, assuming the Roth IRA has also been open at least five years, you can also take out money that’s attributed to investment growth and income.
How Early Retirement Impacts Social Security Benefits
Eligibility for Social Security benefits starts at 62. Even then, it could make sense to draw from retirement accounts longer and delay collecting benefits.
If you retire at age 55, you’ll want to make sure you understand the impact on Social Security benefits. The calculation includes 35 years of average earnings, so unless you started working at age 20, the Social Security Administration will use $0 salary for the last few years when calculating your benefits.
And keep in mind, your statement assumes you keep working with your current income until you collect Social Security benefits. But if you retire early, that won’t be the case.
Health Insurance Options Before Medicare
Unless your spouse is still working and you can join their medical plan, buying your own health insurance may not fit into your retirement budget. With Medicare eligibility beginning at 65, planning for certain healthcare expenses not covered by Medicare until age 65 is crucial. What are your options for health insurance if you retire at 55?
In general, early retirees have five options before Medicare:
- Retirement medical continuation from your employer
- COBRA coverage
- Public healthcare marketplace exchanges
- Private insurance exchanges
- A spouse’s plan
COBRA coverage generally only lasts for 18 months. If you retire at 55, you need 10 years. However, while on COBRA, you can use a health savings account (HSA) to pay premiums.
The public exchanges (Obamacare) will usually be more affordable than private insurance, but it’s still quite expensive and the cost varies by state. Check costs in your area with this calculator from the Kaiser Family Foundation.
Retiring At 55 By Supplementing Income With A Brokerage Account
Is 55 too early to retire? Well, that depends on your expenses, and often, having investments outside of retirement accounts. A taxable brokerage account is the most flexible type of investment vehicle. There is no contribution limit or rules about when you can sell funds and withdraw the cash.
In exchange for this unlimited flexibility, you give up tax-deferred growth and the tax deduction you receive with 401(k) or 403(b) contributions.
But that’s not to say a brokerage account is tax inefficient, either.
Long-term capital gains tax rates are much more favorable than 401(k) or IRA withdrawals which are taxed as ordinary income. In fact, a married couple filing jointly with income under $94,050 in 2024 (or $96,700 in 2025) pay a 0% tax rate on long-term capital gains! Qualified dividends are also taxed at long-term capital gains tax rates.
Along with selling investments, dividends and interest can help generate income to fund an early retirement.
Figuring Out If You’ve Saved Enough To Retire At 55
At any age, you’ll want to make sure you’ve fully thought through your retirement plan (financially and otherwise) before retiring. Retiring early requires even more planning as the traditional sources of retirement income aren’t available and new challenges, like health insurance, arise.
For executives looking to retire at 55, here are some retirement planning tips to help ensure a successful early retirement:
- Realistic estimation of your expenses
- Consider how a longer period in retirement affects your strategy
- Run projections to figure out of your retirement savings may be enough or if you need to consider delaying retirement
Check Your Living Expenses
Estimating your annual expenses in retirement is difficult. Although some costs fall off (like 401(k) contributions), others, like eating out and traveling, increase dramatically at the beginning of retirement.
Whether you can afford to retire early is more about your expenses than savings. Said another way, what you’re going to spend drives how much you’ll need saved so you don’t run out of money.
For example, imagine retiring at 55 with a $10 million portfolio. For many workers, this asset level would far exceed income needs. But not everyone has the same lifestyle. If this investor takes out $1 million a year, then the money wound run out before age 70. And that’s assuming a 6% return and ignoring inflation and market volatility.
When running the numbers, be realistic and honest with yourself. Saying you’ll cut back without any sense of what that means for your lifestyle is a mistake.
Longevity Increases The Risk Of Running Out Of Money When Retiring Early
People are living longer. This means your retirement age plays a key role in helping ensure you don’t run out of money.
Here are some statistics according to 2024 data from J.P. Morgan and Longevity American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator.
For a 65-year-old heterosexual couple, non-smokers, in excellent health:
- The female has a 72% probability of living until 85 and 31% chance of living until 95
- The male has a 63% probability of living until 85 and 22% chance of living until 95
- There’s a 73% chance at least one person lives until 90 and a one in five probability one spouse makes it to 100
- The probability of both living to age 85 is 46%, dropping to 23% by age 90, and falling to 7% at 95
So if you retire at 55, you’ll probably spend more time in retirement than you did working. It sounds nice, but affording it requires lots of planning and a disciplined approach to saving and investing.
How Much Money Do You Need To Retire At 55? Stress-Testing An Early Retirement Plan
The uber-simplistic example above doesn’t factor in market volatility, taxes, inflation, or other changes to your cash flow or expenses that impact outcomes. Before making a major financial decision like when to retire, consider developing a financial plan with the help of a CERTIFIED FINANCIAL PLANNER™ professional.
To answer the question and feel confident in your decision, your plan should include a Monte Carlo simulation to plan for market volatility. A Monte Carlo analysis is a stress-test for your retirement plan.
Putting everything together in a comprehensive financial plan is often the best way to figure out if you can retire at 55. Even if it’s too early to meet your financial goals and give you the lifestyle you want, perhaps working for a couple more years will get you there. Running the numbers will help you understand what trade-offs exist and what options best suit your needs and goals.
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