Retiring at 55: Rules of the Road

Retiring at 55: Rules of the Road

Do you want to retire before Social Security kicks in, say at age 55? Should you? Could you?

The Rules of the Road

  • Plan on living longer than the charts show. Your money has to last.
  • Plan on medical insurance premiums and medical costs rising much faster than inflation.
  • Plan on long-term care costs and insurance also rising much faster than inflation.
  • Don't under-budget. Retirement is not cheap, especially if you plan to own a second home, live an active lifestyle, and/or travel.
  • Be careful choosing entirely fixed income options (bonds, traditional annuities, and CDs) since your principal can't grow to keep pace with inflation.
  • Don't count on inheritances.
  • Continue to invest for growth, not purely for income.


Early retirement is a dream for many. Making this dream come true involves a healthy dose of realism, though.

You've probably read that you need 60% - 80% of your pre-retirement income to enjoy a comfortable retirement at a standard similar to that of your pre-retirement lifestyle. Since most early retirement income comes from taxable sources, 80 percent is usually a more realistic figure than 60 percent. If you retire early, you will have to provide for all your income needs from your own resources. The typical resources my clients rely on are:

  • Company/government defined benefit pension plans (if they provide early retirement benefits)
  • Defined contribution lump sums, 401(k)s, and other qualified retirement plan funds such as IRAs and 403(b)s
  • Personal investments (including non-retirement annuities, mutual funds, stocks, bonds, CDs, and cash)
  • Proceeds from downsizing a home
  • Direct Participation Programs


There are some important considerations when you make plans to access your sources of retirement income.

Company Pension Plans
If you are one of the lucky ones, you will have a small defined benefit plan payment based on your years of service and salary at the time you retire. This may be only a small fraction of your pre-retirement income perhaps 15-20 percent. And it will be taxable.

This pension is normally a fixed amount, so its value will fall over the years. In fact, that is the biggest risk my clients face - that the income generated by their retirement plans and assets won't keep up with inflation. At three percent inflation, the value of a dollar will drop by half in 24 years; at four percent, it will only take 18 years. It is this inflation risk, combined with the 'risk' of living too long, that makes planning and careful investing so critical.

Individual Retirement Accounts
Since you will be in charge of making sure you have the income you need when you need it, it makes sense to gather all your qualified retirement assets under one umbrella your IRA(s). Gathering the assets you have in company defined contribution, 401(k), 403(b), profit sharing, and other plans into your personal IRA is an essential element of early retirement. Money left under the control of the custodian chosen by your old company is money you will have a hard time accessing. There are procedures, often drawn out, for getting the money; it's far easier to deal with everything at once and have the money under your control and management.

Once you have all your retirement funds in one place, we can structure a portfolio that accommodates your needs and risk tolerances to ensure you can take out the funds you need.

Keep in mind that you must take payments out of your tax-deferred IRAs (including rolled over or transferred funds) in 'substantially equal payments for your expected lifetime, or for at least five years, whichever is longer' to avoid paying the 10 percent early withdrawal penalty. If you will be at least 59 years old the year you begin taking withdrawals, the penalty does not apply. In either case, withdrawn amounts are taxable, unless the money is from a Roth IRA.

The money in your IRA(s) is probably going to be your biggest source of retirement income. And don't forget, there are products available that allow you to insure your portfolio against loss and can even guarantee a minimum return! Many clients use this strategy with their old 401k rollovers and serious retirement money.

Personal Investments
If IRAs and defined benefit plans can't provide the full amount of retirement income needs, there are several other sources of income to take up the slack. One of the main options is planned withdrawals from personal assets such as mutual funds. This money is often largely tax-free since the taxes on dividends and much of the capital gains is paid each year, and the remaining capital gains are currently taxed at a very favorable rate.

Ideally the amount taken from these sources can be limited to the annual dividend and capital gains amounts, resulting in a lower tax rate and potential future growth of the invested principal.

Downsizing
There may be a lot of equity in your home & money that can be accessed tax-free (up to $250,000 per owner). If downsizing is in your plans, this is a potential source of tax-free income.

Direct Participation Programs
These investments allow for pass-through of both cash flow and tax benefits of the underlying investment. Typically, these are for accredited investors and are passive investments which invest in real estate, energy, lease programs, and secured notes to name a few. Investors are attracted to these as they are not correlated to the stock markets, they can provide additional diversification to a portfolio, and many are asset-backed.

Tax Efficiency
Structuring the retirement income stream to minimize taxes is an important objective. By choosing the various sources of funds carefully'mixing funds that are tax-free, taxed at capital gains rates, and taxed at income tax rates'it is possible to increase net income from a pool of money.

Early retirement is a dream, but it can be a reality. Sit down with your financial advisor and explore your options; your advisor just might be able to make it happen for you. And remember the words of Mr. Jim Rohn, 'If you keeping doing what you've always done, you'll keep getting what you've always gotten'.

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