Spending your twilight years globetrotting, doting on grandchildren and not worrying about money is the retirement dream. But before you settle on early retirement, consider a few issues. At 55, you cannot tap into your retirement accounts and Social Security without tax penalties.
Failing to account adequately for their life expectancy leads many couples to underfund their retirement accounts. According to the Society of Actuaries, females have a 50 percent chance of seeing age 85, while men have a 40 percent chance. Retiring at age 55 means saving enough for at least 30 years of income without a job. By adequately accounting for your life expectancy, you ensure you do not short-change yourself.
Sources of Income
You need independent sources of income to fund your retirement until the age of 59-1/2. According to U.S. News, the majority of your income between the ages of 55 and 60 come from a pension, spouse’s job, rentals, savings, or investment accounts. You should only tap your retirement accounts in an emergency to avoid taxes and penalties before you reach the minimum retirement age.
Total Retirement Income
According to Time Business & Money, you need 80 percent of your previous year’s income to account for one year in retirement. So, multiple your previous year's income by 0.80. Then multiply the product by the number of years you expect to live -- the minimum being 30 -- to get the total amount of money you need in retirement. A couple making $50,000 needs at least $1.2 million -- more if they live past age 85.
Social Security income does not kick in with reduced benefits until the age of 62 with a reduction of 30 percent of your benefits. You may withdraw from your 401(k) at 55 provided you are no longer employed with the company. You do not pay an early withdrawal penalty but you do pay income taxes on your withdraws. You may withdraw your contributions from an IRA before age 59 1/2 but withdrawing the earnings results in penalties. Consider enrolling in a substantially equal periodic payment program (SEPP) with your IRA or 401(k) plan. A SEPP allows you to withdraw from a 401(k) or pre-tax IRA without penalties as long as it continues for at least five years.
- Bankrate: Retire at 55? Think Again
- U.S. News: How to Withdraw Retirement Funds Before Age 59
- U.S. News: Take an Early Retirement Test Drive
- Time Business & Money: Sizing Up the Big Question: How Much Money Do You Need To Retire?
- Society of Actuaries: Retirees Underestimate Life Expectancy, Risk Underfunding Retirement
- Social Security: Retirement Planner: When To Start Your Benefits
- Jupiterimages/Photos.com/Getty Images
- How Much Does a Person Need at Retirement?
- How to Know if I'm on Track for Retirement
- What Does the Average Person Have Saved for Their Retirement?
- How Much Tax Do You Pay on an IRA on Retirement?
- What if I Don't Have Enough Credits for Social Security Benefits When I Retire?
- How Much Do You Get from Social Security?
- The Tax Advantages of Working Over Age 60
- 8 Rules of Thumb for Saving for Retirement