Deciding to retire at age 55 with $800,000 in savings is a significant choice that requires careful financial planning. The traditional advice for retirement savings is to have seven times your annual salary by age 55, which is geared toward retiring at 67. For instance, if you earn $70,000 annually, you should aim for at least $490,000 saved by age 55 to be on track for retirement at 67. Retiring 12 years earlier at 55 requires a reevaluation of these figures.
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Assessing The Amount Needed For Early Retirement
Fidelity Investments recommends saving at least 10 times your income by age 67, under the assumption of beginning savings at 25 and retiring at 67 while maintaining your preretirement lifestyle. For someone earning the median U.S. income of $74,580 based on 2023 data, you would need approximately $745,800 saved by age 67. This guideline assumes you begin saving 15% of your income annually starting at age 25 and plan to maintain your preretirement lifestyle.
Retiring at 55 means you will need to fund an additional 12 years of retirement. Assuming you’ll spend around 80% of your annual preretirement income each year, the additional savings needed to cover these 12 years amount to approximately $715,968. The total savings goal for retiring at 55 with a median household income of $74,580 is approximately $1.5 million.
This amount is an estimate and varies based on lifestyle, investments, healthcare plan and living situation. Additionally, you could outlive the expected lifespan for your gender and need to fund years or decades more than you expected.
Comprehensive Retirement Planning For Early Retirement at 55
When considering early retirement at 55, it’s crucial to thoroughly analyze your financial readiness. If you lived into your 90s, you’d be covering living expenses for over four decades. This process involves a detailed look into various aspects of your financial life.
Retirement expenses projection: The 25-times rule is a common guideline, suggesting that saving 25 times your annual expenses is ideal for a comfortable retirement. As retirement nears, it’s advisable to make necessary portfolio adjustments to reduce risk exposure.
Maximizing retirement contributions: Focus on contributing to tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs). Take full advantage of employer match programs in 401(k) plans, as they offer free money and an immediate return on contributions.
Consulting an expert: Seek advice from a financial adviser for tailored strategies on managing debt and planning for retirement.
Alternative income streams in retirement: Consider options like real estate rental, starting a small business or consultancy. These can provide additional financial stability beyond traditional retirement savings.
Social Security and pension analysis: Understand that Social Security benefits are typically unavailable until age 62. Consider how to bridge the financial gap if retiring at 55. Pension funds and annuities can supplement retirement income but may be reduced if taken early.
Reducing expenses and debt before retirement: Prioritize paying off high-interest debts and minimize nonessential spending. Downsizing or moving to a more affordable area can help increase retirement savings and reduce monthly expenses.
Healthcare considerations and costs: Plan for healthcare expenses before Medicare eligibility at 65. Explore options like COBRA or the individual market for health insurance coverage during the interim.
Tax and inflation impact: Be aware of the tax implications of withdrawing from retirement accounts and the influence of inflation on your retirement income. Roth IRA distributions are tax-free, while 401(k) distributions are taxed.
Emergency fund: Establish an emergency fund with at least three to six months of living expenses to avoid new debt during retirement.
Expense categorization: Create a categorized list of expenses to identify areas for potential savings, distinguishing between essential expenses (housing, utilities, healthcare) and discretionary spending (dining out, entertainment, travel).
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*This information is not financial advice, and personalized guidance from a financial adviser is recommended for making well-informed decisions.
Jeannine Mancini has written about personal finance and investment for the past 13 years in a variety of publications including Zacks, The Nest and eHow. She is not a licensed financial adviser, and the content herein is for information purposes only and is not and does not constitute or intend to constitute investment advice or any investment service. While Mancini believes that the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.
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This article If You Have $800,000 Saved, Is It Possible To Retire Early At 55? originally appeared on Benzinga.com
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