Can I retire early at 55?
Health insurance is a big hurdle
If you retire at 55, you won't be eligible for Medicare until 65. You'll need to buy private insurance or use COBRA, which can be expensive. The Affordable Care Act (ACA) subsidies may help if your income is moderate.
Some people retire at 55 and use ACA plans until Medicare. Others work part-time for benefits. Budget $500–$1,500 per month per person for health insurance, depending on your situation.
- ACA marketplace plans can be subsidized based on income
- COBRA lasts 18 months but is often costly
- Consider a health savings account (HSA) to save for future medical costs
Accessing retirement funds before 59½
Traditional 401(k)s and IRAs charge a 10% penalty for withdrawals before age 59½, plus income tax. But there are exceptions: the Rule of 55 allows you to withdraw from your current employer's 401(k) if you leave in the year you turn 55 or later.
You can also use a Roth IRA conversion ladder or 72(t) distributions to access funds early. Each has rules and tax implications, so consult a tax professional.
- Rule of 55: penalty-free 401(k) withdrawals if you leave your job at 55+
- 72(t): substantially equal periodic payments from an IRA
- Roth IRA contributions can be withdrawn anytime tax- and penalty-free
Common mistakes
- Underestimating healthcare costs before Medicare eligibility.
- Forgetting the 10% early withdrawal penalty on IRAs and old 401(k)s.
- Assuming you can withdraw 4% per year for a 40-year retirement; you may need a lower rate.
