If you’ve accumulated $1 million, you’ve likely spent years saving for your future. You might be ready to retire at age 55 with a seven-figure nest egg. Depending on your expenses and retirement plans, you may find that the amount is enough to support your lifestyle. For those with higher costs of living, the amount might not carry you through the following decades.
Before you retire at age 55 with $1 million, you’ll want to:
- Plan for a long retirement.
- Think about withdrawal strategies.
- Consider your Social Security options.
- Get access to health insurance.
- Factor in taxes.
- Stay open to work.
Plan for a Long Retirement
While retiring at 55 with $1 million may be possible, it requires planning and a watchful financial eye. “Most people are living into their 90s, so the $1 million will have to last 35-plus years,” says Aviva Pinto, managing director of Wealthspire Advisors in New York City.
You’ll also want to factor in rising costs, as inflation tends to cause prices to increase every year.
Think About Withdrawal Strategies
A common rule of thumb is to take out 4% of retirement savings every year to have funds that last for 30 years. If you have a $1 million nest egg, that would come to an annual withdrawal of $40,000. “You might find the 4% rule doesn’t work based on your total expenses,” says Kevin Lao, a financial planner and founder of Imagine Financial Security LLC in Jacksonville, Florida. If you still have a mortgage or are supporting your adult children, it could be hard to live on that much, depending on the cost of living in your area.
To set up the right withdrawal strategy, it’s important to think about your upcoming goals and hobbies. If you retire at age 55, you might spend the next two decades living a very active lifestyle. Many events will come with a price attached, though you might also look for free and low-cost outings in your community to stay within a budget.
Consider Your Social Security Options
As you plan your income sources, keep in mind that Social Security won’t be available right away. You can apply for benefits starting at age 62 but you’ll receive a reduced monthly amount. Most people reach their full retirement age at 66 or 67, and at that point are eligible for the entire benefit. Waiting until after your full retirement age to claim Social Security will lead to an increase in benefits up to age 70.
“Deciding when to take Social Security is highly personal,” says Kendall Meade, a financial planner at SoFi in Charleston, South Carolina. As you evaluate your options, you might find it difficult to wait until age 70 to get the maximum amount. Or you may choose to downsize your home, sell a vehicle and take other measures to greatly reduce your regular expenses so that you can take increased benefits later.
Get Access to Health Insurance
The government provides health coverage for individuals starting at age 65 through its Medicare program. If you step away from work when you’re 55 years old, you’ll have to wait a decade for this insurance. Paying for medical bills and prescriptions on your own could be costly. However, if your spouse is still employed and has health coverage, you might be able to be on their plan.
There are some exceptions to getting Medicare, such as if you have a disability and qualify for coverage at an earlier age.
You might also consider private insurance options. Looking through your medical records and bills could give you an idea of what you spend annually on health costs. It might also help you understand the type of coverage that will best suit your situation.
Factor in Taxes
Depending on your retirement accounts and withdrawals, you may have to pay taxes on your retirement income. When you take money in retirement from a 401(k) or IRA, the money will be considered taxable income. If you have a Roth IRA, you won’t have to pay taxes on the distributions.
Your location could also impact your tax amounts, as some states charge more taxes than others. States with no income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
“If we assume that a person retires at 55, lives in a home in Florida that is already paid off, has no dependents to put through college or pay for weddings, has no other debt, invests the $1 million in a moderate portfolio that earns 6% on average a year, receives Social Security at full retirement age of $34,000 a year, they can spend no more than $62,000 a year in order to have a better than 75% probability of having the money last 35 years,” Pinto says.
Stay Open to Work
Even if you’re ready to retire at age 55, your preferences could change over time. “We see many retirees go back to work in some capacity,” Meade says. “Most take on a lower-stress job that they simply enjoy or transition to working just a couple of days per week in a part time or contractor position with their original job.” There could also be a passion project you’re interested in pursuing that may lead to extra income.
“Know that you have some flexibility for work if you have valuable skill sets,” Lao says. The additional cash might help fund savings accounts or pay for travel and other leisure pursuits while keeping you engaged regularly with others.
