By Patricia Sanders
For preparing a financial plan, early retirement age is defined as any age before 65. As per the rule, a per can’t be eligible for Medicare benefits until the age of 65. So, if you retire early at 55, you must prepare other plans to get adequate health insurance coverage for you. You can plan this by accessing healthcare plans through the health exchange marketplace. You’ll get guaranteed coverage and cannot be denied due to pre-existing conditions. Apart from that, there are no extra charges if you have prior medical conditions.
So, you may secure your healthcare plans easily, but if you require to retire early at 55, there are other few things you need to consider. Below I have outlined the reasons – why you can retire early at 55 and the major things to consider if you are serious about early retirement.
Why do you have to retire early at 55?
There are a few reasons why you may retire at or before 55. These reasons are as follows:
a) You’ll have an extra 5 years to prepare
Let’s say you started saving and investing in your 25th and decided to retire early at 50.
Over the next 25 years, you save and invest at an average rate of 6% per year. By age 50, suppose you’ll save $1,080,200.
But if you save and invest for an additional 5 years, by age 55 you’ll save more.
So, by delaying your retirement by just 5 years you can build your nest egg more strongly and it’ll make a real difference on how well you will live after retirement.
The benefit of this strategy is you still have an extra 5 to 10 years (conventionally) if your retirement investment strategy doesn’t work as planned.
b) You’ll need to cover 5 years less in retirement
If you expect to live till your 90s, you’ll need to give yourself 40 more years if you retire at 50. But if you retire early at 55, you’ll need 35 years.
Through this strategy, you’ll save 5 years more and the retirement savings may cover 5 years less time.
c) You’ll have 5 fewer years paying for private health insurance
Health insurance is one of the biggest issues you may face if you opt for early retirement. As you are retiring before 65, you won’t be eligible for the benefits of Medicare.
So, you’ll need sufficient coverage on the health insurance. So, if you work for 5 more years and retire early at 55, then you may opt for private health insurance 5 fewer years.
d) It’s a chance to start a new career
If you want to start your own business, you have to do it soon. You’ll be a more desirable job candidate to many employers as you may have served a good number of years working efficiently, and you have a good experience.
If you want to start a new venture, it is better to initiate as early as possible. At this point, the age of 55 is best to launch your new business. You have at least another 20 years or more to devote to your business.
Now, let’s talk about things you should consider before retiring at 55.
a) Eliminate old debts and avoid new
This is a good strategy that you should always implement while trying to accumulate a large amount of money for your retirement, especially when retiring early at 55.
People may save enough for retirement, but they might forget about their debts. If you plan to retire by age 55, that’s one hell of a thing which you can’t afford to forget.
Adding new debts to your budget, you’ll be increasing your monthly expenses through debt payments. If you retire along with those debts in your shoulder, you’ll require even more income to cover them after retirement.
Eliminating old debts and avoiding new debts have these benefits:
- It helps you to save more of your income during your work life until you retire.
- It keeps your living expenses under a minimum level during retirement. The less you spend during retirement, the longer your saved funds will remain.
- You should have a debt elimination plan to eliminate all unsecured debts. That includes payday loans, private student loans, personal loans, and credit card debts.
b) Live on fewer expenses
With this strategy, you’ll be able to create extra space in your monthly budget and can save more money without increasing the saving rate.
The less money you use monthly, the more you can save, and the more you can deposit into your retirement account. Cheap living can be beneficial to increase your savings for retirement.
c) Boost your savings
To boost your saving rate you must consider how much you already have saved, your present age and how much you’ll require in retirement. You don’t necessarily need to increase your savings rate. It’s important to build your nest egg but realistically.
You can’t maintain a saving rate that hampers your minimum required monthly budget. You may contribute as much as you can, but don’t overdo it. Plus, don’t forget that you’ll have access to Social Security benefits in retirement!
d) Get enough insurance coverage
You may opt for your workplace healthcare coverage until you are working. But when you retire, especially at your 55, it will require some more insurance coverage from your end.
If you want to retire early at 55, you have another 10 years to become eligible for Medicare. Without Medicare, you’ll be taking a huge risk. So, you should check whether your employer can cover you into retirement.
You may opt for coverage under your spouse’s insurance. You may also get quotes from private insurers, that way you can correctly budget for the costs of long-term healthcare.
e) Remember about taxes
After retirement, you’ll have enough time to rest and relax. But, even at that time, you will also have to remember about taxes.
Taxes might impact your finances if you make withdrawals from your retirement accounts. Accounts like your 401(k) and traditional IRA may grow tax-free, but your withdrawals are taxable.
Having a Roth IRA is beneficial in this situation. You may contribute to a Roth IRA after taxes. That means that you don’t have to pay taxes if you make withdrawals from that account.
It is wise to opt for a mix of retirement accounts like a Roth IRA and a 401(k). This way you don’t get too affected with your taxes.
Retiring early at your 55 can be lucrative after working for so many years. But it’s not as easy as it seems.
You might be quitting your job 10 years ahead of schedule, so you must plan carefully to get your income, savings, insurance, and taxes in order.
If you feel that getting retired ahead of time is quite unrealistic, and you can’t keep up the pace, you may push back your retirement a couple of years.