Retiring at 55 [What You Need to Know]

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Retiring early: it’s a lot more common than you might think. Even those who love their careers and what they do often dream of calling it quits to pursue other goals and interests earlier than the usual retirement age. The desire to travel and see the world is a frequently touted reason.

Unfortunately, the economy is quite uncertain at this point and retirement for those in their 60’s may have potentially been pushed back for a few years. Still, there are things you can do within your control to ensure the best chances of retiring early. If you’re interested in learning what you need to know in order to retire at the age of 55, welcome to this post.

We’ll bring up all the numbers you need to know as well as certain things to expect if you’re planning to retire at 55.

What are some of the concerns with retiring at age 55?

  • You have fewer working years under your belt, aka fewer years to save
  • You’ll need a higher savings-to-spending ratio
  • Your retirement will be longer, hence you’ll need more in your retirement funds
  • The dreaded sequence of returns risk
  • Your social life make look a bit different, for better or worse
  • Boredom – you may think we are joking, but boredom is actually a serious issue

How common is early retirement?

As we stated above, early retirement may be much more common than you’d think. However, it doesn’t usually happen in your 50s.

The median age of expected retirement is 65 years of age, but the median reported age of actual retirement is 62 according to the Employee Benefit Research Institute. Half of all Americans are retiring between the age of 61 and 65. That’s a really modest level of early retirement.

Some of these early retirements were due to unexpected disabilities or health decline. Many more recent ones have been due to the pandemic. Unfortunately, the more advanced you are in age, the harder it is to simply bounce back into the workforce after something as impactful as COVID-19 has occurred.

What is the average retirement savings by age 55?

According to a Vanguard study done in 2022, the average retirement savings for the age group 55-64 is around $256,000. However, that isn’t the best measure of the nation as a whole. The median balance for the same age group is around $89,000. That’s a really sobering statistic to look at, most people really doesn’t save nearly enough to retire even by 65.

You’d think that with all the Financial Independence, Retire Early (FIRE) groups posting online about retirement that 55-year-old retirees would be a much more common occurrence. Apparently not. However, that doesn’t mean that you can’t do it. You just have to accept that you’re going against the norm and that it may be harder than you’d expect. However, with all the right tools and numbers at your disposal, it does make the process much easier.

What do I need to know to retire by 55?

How much you’ll need to retire by 55

The main thing you need to know to retire by 55 is how much money you need saved up. In the FIRE community, a common rule of thumb for retiring comfortably is 25 times your yearly expenses. For example, if you’re living on $40K a year, you’ll need $40,000 x 25 which is $1 million to retire. If you live on $60k a year you’ll need $1.5 million to retire.

Believe it or not, this rule of thumb does not apply specifically to retiring at 55 years of age. That’s the great thing about it. It’s designed to not allow you to run out of money. How does it work? Well, theoretically, you’d be hoping that each year, the market helps your retirement nest grow 5% on average, and you’d be taking 4% of it to fund the year. That way, you would never run out of money for an infinite number of years barring really bad luck. Chances are, it’ll continue to grow beyond your original amount through retirement.

How your health insurance will be covered

This one’s a major deal in the US. Health insurance premiums are no joke, and since you won’t be working to fund health insurance during your retirement years, you’ll need to account for it. You can either fund it mainly using your nest as the source of funds, or you can try to get subsidies based on how much you’ll need to fund your lifestyle during retirement. Generally, retirees are able to spend less to live during retirement because of pensions, social security, subsidies, etc. One of these forms of help includes the help you can get if you’re low-income enough during retirement to qualify for health insurance subsidies with the Affordable Care Act. The strategy will defer depending on which state you live in.

Health insurance is an extremely complex system in the US, but there is a great explanation by GoCurryCracker on Obamacare Optimization in Early Retirement. We highly recommend you give it a thorough read.

Savings to spending ratio – How you will save the money for early retirement

You’re going to need to accumulate money during the years leading up to age 55, the age you plan on retiring. If you’re doing things right, you generally will make more money the more advanced in age you get. For example, leveraging your current job to land you a new job with higher pay several times a decade will help immensely in your wealth accumulation stages; that is, in your 20s, 30s, and 40s.

But you also need to realize that most people need to up their savings ratio in order to hit their goal of retirement at 55. It may seem like common sense, but it’s rare that anyone ever really puts in the work to come up with the exact numbers needed for their own situation. However, a good general perspective to keep in mind is that if you save 50% of your income each year, that means you were able to save for a year of retirement in the future. Say you make $100k a year post-tax. If you’ve saved 50%, that means you used up $50k to live that year, but you also saved $50k for your future self.

Now up that to a 75% savings rate. You’ve saved up for 3 years for your future self! You used $25k to live for the year, but you saved up 3 times $25k for your future self.

Your savings to spending ratio is important because it doesn’t matter how much you make. If you’re saving only 10% of $1 million a year, it takes 10 years to fund a single year of your retirement. That’s not sustainable at all. You would need to keep working indefinitely until the day you drop dead.

If there’s one silver lining about the pandemic, it’s that people’s savings rates have actually gone up. Prior to the pandemic, Americans saved about 7% of their income. In 2020, that number shot up to 33%. In other words, Americans on average that year were able to fund about half a year’s worth of retirement for their future selves. That’s a step in the right direction. However, you as an early retiree candidate will have to step that up even further. Personally, I recommend saving 75% or more each year. If you don’t make much, it can be extremely hard, and you’ll either need to somehow make more or spend less.

Sequence of Returns Risk

Here’s a topic no one likes to talk about. It’s the dreaded sequence of returns risk. The biggest risk as you approach retirement is unfortunately out of your control, and that is the stock market. If you’re unlucky enough, right when you’re about to retire, the stock market could tumble significantly, and it’ll wipe away your chance at a comfortable retirement. Your odds of surviving a stock market crash during retirement increase significantly the further away the crash occurs from the first year you become retired. You would much rather have a crash occur on year 10 than on year 1 of your retirement.

In situations where you are unlucky enough to encounter this, you have a couple choices:

  1. Keep working and delay your retirement.
  2. Or cut your spending to even less than you originally planned, so that spending uses no more than 4% of your new net worth post-market tumble.

How to predict your chances of success at retiring by 55

Now let’s get to looking at how you’ll fare in reaching your goal of retiring early. My favorite calculator to use is FIRECalc, which predicts how long you’re money will last for your particular situation. You can be as general or as specific as you want.

What this calculator does is, it takes into consideration over 100 different periods of 30 years, including periods that include the Great Depression, and plots the chance of success you’d have in retirement with the money you’ve accumulated. It helps you visualize the trajectory of your net worth and savings, so you can see how many of these 30 year periods you would survive with a balance over $0 at the end vs. those you would fail. If you could get a success rate of over 95%, I’d say that’s pretty iron-clad and you should feel comfortable going into retirement with the stats you put into the calculator.

Play around with it and familiarize yourself. It’s fun to know how different scenarios will fare, and it’ll get you focused on what you’ll need to perhaps change to give yourself the best chance of retiring at 55.

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