7 Steps To Retire by Age 55

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The dream of early retirement remains out of reach for most people because it’s a double-edged sword: You get fewer years to save and more years to make those savings last.

But it’s not impossible.

With intelligent planning, wise investments and diligent saving, you might be able to shave 10 years off the typical target age and start living your retirement dreams when you’re as young as 55. There’s a lot to consider — where you’ll live, what you’ll live on, how you’ll invest, the impact on your taxes and where Social Security fits into it all. No matter your age or income, the time to start strategizing is now.

Here’s how to retire at 55.

Talk to a Pro Before You Do Anything

Even if you’ve never worked with a financial professional, retirement planning is too complex for most people to manage alone. As you’ll see in the following sections, you’ll be working through complicated and consequential considerations such as taxes, investments, fund distributions, Social Security and healthcare. Don’t go it alone.

Look for fee-only professionals who don’t earn commissions from the financial products they recommend. There are many specialties. For example, a certified financial planner (CFP) with expertise in retirement planning might help you build a nest egg while a certified public accountant (CPA) specializing in retirement planning can help with taxes. You also can identify the type of professional you need by job title — e.g., chartered retirement planning counselors (CRPC), retirement income certified professionals (RICP) and chartered retirement plans specialists (CRPS).

Are You Retirement Ready?

Scout Locations and Plan Your Lifestyle

The same nest egg that might last a few years in some cities could last a few decades in others. Organizations such as the AARP assign livability scores to different locations based on factors such as living costs, housing availability, crime and access to healthcare.

Unless you’re really rolling in money, you’re looking for a location that strikes a balance between affordability and livability. AARP profiles small towns, small cities, mid-sized cities and big cities, so there’s something for every lifestyle — and your retirement lifestyle should play a big role in your planning.

Will you live in a house that you’re building equity in now? Will you sell and downsize? Will you keep your home as an investment property for rental income? Do you plan to travel? Move closer to your family? Start a business? 

These are questions that a good retirement planner will ask, and you can’t plan ahead if you don’t know the answers. 

Fund an HSA

If you retire at 55, you’ll have to wait a full decade before you become eligible for Medicare. You could, of course, just enroll in a standard health insurance policy until you turn 65, but every monthly premium you pay between now and then will be gone forever. 

But if you have a high-deductible plan, you can open a health savings account (HSA). Unlike health insurance premiums, the money you contribute to an HSA is yours to keep — both now and in retirement. HSAs offer a triple tax advantage that you can’t get with any other kind of account. First, your contributions are deductible and reduce your taxable income. Second, your investments can grow tax free. Finally, you can make qualified withdrawals tax free, no matter your age. 

Are You Retirement Ready?

If you’re looking to retire early, an HSA can help get you there with a tax-exempt stash of money that you can use to pay the healthcare bills that Medicare doesn’t cover.

Sprint to the Finish Line By Maxing Out Catch-Up Contributions

Maxing out your 401(k) or IRA has to be a priority for anyone who wants to retire early. The maximum 401(k) contribution for 2022 is $20,500 — but only for those younger than 50. Five years before your planned early retirement age of 55, the government allows you to start making catch-up contributions to supercharge your savings. In 2022, you can stuff an extra $6,500 per year into your retirement plan starting at age 50.

Provide Extra Financial Security With Permanent Life Insurance

Whether you max out your 401(k) or not, you can’t touch your retirement fund until six months after you turn 59. That leaves you more than four years with a nest egg that you can’t access without losing 10% of it to an early withdrawal penalty. 

Although the primary purpose of life insurance is to provide financial security for survivors in the wake of a death, the right kind of policy can double as another source of funding in retirement. 

Permanent life insurance policies — like variable, whole life and universal — let policy owners build up cash value as they pay their premiums. You can then withdraw or borrow from the policy on a tax-deferred basis when necessary until you’re old enough to tap your 401(k).

Consider Annuities for Lifetime Income

You’re much more likely to outlive your money if you retire early — you’ll need to add at least another decade’s worth of income to your timeline.

If 55 is your target date, you might consider investing in annuities, which are the only investment that can guarantee lifetime income. Annuities provide predictable payments that don’t fluctuate with the market and the economy like stocks and bonds do. There are potential drawbacks and tax considerations that you’ll need to discuss with your advisor, but no other investment guarantees income for life.

Are You Retirement Ready?

Have a Plan for Taxes in Retirement

No matter your age, retirement comes with substantial tax considerations. If you have a Roth account, you can make tax-free withdrawals at 59 1/2, but you’ll have to pay taxes on distributions you take on tax-deferred accounts such as 401(k)s and IRAs. Your tax bracket is likely to change and you might have to pay taxes on some of your Social Security benefits.

That’s just the beginning. Planning for income to support you in retirement is half the battle. The other half is predicting and planning for the taxes you’ll pay on that income.

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