Can you retire at 55?
Will today's savings, plus what you add each month, be enough on your 55th birthday? Check the surplus or gap, then what the Rule of 55 and the ten years to Medicare mean for the plan.
To retire at 55 on $55,000 a year, with no Social Security or pension counted, you need
$1,375,000
Saving $2,800 a month from age 42, you reach $1,379,174 at 55: on track, with $4,174 to spare.
Saving $2,782 a month would still get you there by 55.
- Years from 55 to 59½ that need a bridge
- 4½ years
- $247,500 of spending in today's money. Routes: the Rule of 55 for the 401(k) at the job you leave; for an IRA, a 72(t) series or a Roth ladder begun earlier.
A steady return every year, in today's money, with savings added before each year's growth. Taxes, health cover costs and the order in which good and bad years arrive are not modeled; Social Security or a pension counts only if you enter it. The link carries your figures after the #, so you can save or share it. Your figures are not sent to us.
The Rule of 55 opens your last 401(k) early
Leave your job in or after the year you turn 55 and the 401(k) or 403(b) at that employer can pay you with no 10% additional tax, even though you are under 59½. That makes 55 the first age at which most people can live on workplace retirement money without a special schedule.
Three checks before you count on it. It covers only the plan at the job you leave, not plans left at earlier jobs. It does not cover IRAs, and rolling the plan into one ends it. And plans set their own payout options, so ask yours how withdrawals can be taken. Money already in an IRA can use a 72(t) series or a Roth conversion ladder instead. The Rule of 55 calculator shows what your plan covers.
Ten years until Medicare
Medicare starts at 65. Retire at 55 and the decade in between needs cover you buy: COBRA from your employer for up to 18 months in most cases, then a marketplace plan. The cost belongs in the yearly spending you enter above, not on top of it.
Withdrawals under the Rule of 55 are taxable income, and income sets marketplace subsidies. See health insurance in early retirement for what the cover adds to the number.
The first years carry the most risk
The calculator uses the same return every year. Real markets do not, and the order matters most just after you stop: a fall in the first years forces you to sell low to pay the bills.
The opening example arrives at 55 with $4,174 to spare on a $1,375,000 target. That is on track on paper and thin in practice. Try a lower withdrawal rate to see what a cushion costs.
Retiring at 55: what people ask
- Can I retire at 55 with $1 million?
- 4% is the common starting point, from Bengen (1994), a study of US history over 30-year retirements, and not a guarantee. At a 4% withdrawal rate, $1,000,000 would support $40,000 a year of spending if that history repeats; at 3.5%, $35,000. If what you spend, including health cover until 65 and the tax on withdrawals, fits inside that, the sum covers it on those terms. Retiring at 55 can mean a retirement longer than 30 years, and the calculator uses the return you enter, not the historical sequence, so a longer retirement or a lower return may call for a lower rate. Enter $1,000,000 as invested today to see it against your own spending.
- What is the Rule of 55?
- If you leave your job in or after the year you turn 55, withdrawals from that employer's 401(k) or 403(b) avoid the 10% additional tax that normally applies before 59½. For qualified public safety employees the test is age 50 or 25 years of service under the plan, whichever comes first. Income tax still applies.
- Does the Rule of 55 work for an IRA?
- No. It covers only the plan of the employer you leave, not IRAs and not plans left at earlier jobs. Rolling that 401(k) into an IRA ends the exception for that money. An IRA can still pay out early through a 72(t) series.
- How do I cover health insurance from 55 to 65?
- Usually through a marketplace plan, or COBRA from your last employer, which generally runs 18 months. Medicare starts at 65, so that is ten years to pay for. Marketplace subsidies depend on income, and Rule of 55 withdrawals count as income.
- What if markets fall the year I retire?
- Withdrawals taken while prices are down sell more of the portfolio, and those shares are not there for the recovery. That is sequence risk, and it bites hardest in the first years. A plan that only just reaches its number has no room for it, which is why some people keep a cash reserve, use a lower withdrawal rate, or keep some paid work at first.
Sources: Internal Revenue Code §72(t)(1), §72(t)(2)(A)(v), §72(t)(3)(A) and §72(t)(10); 29 U.S.C. §1162 (COBRA coverage period); 42 U.S.C. §426 (Medicare at 65).