Being ready to retire means more than being ready to stop waking up at 6:00 a.m. to put in long hours at a job you’re not thrilled about. If it were that simple, most of us would retire at 25.

What it really takes to retire is a solid grasp of your budget, a carefully considered investment and spending plan for your life savings, debt that’s under control, research into things like the advantages of 55+ communities, as well as other living arrangements that may be open to you now, and a plan you’re excited about for how you’ll spend your days.

So how will you know when to retire? After reading this article, you will get answers to that:

• When can I Start Receiving Retirement Benefits?
• 9 Signs You Are Not Financially Ready to Retire
• How much will I get in Social Security if I Retire at age 62?
• Can I Retire at 55?

When can I Start Receiving Retirement Benefits?

You can start receiving your Social Security retirement benefits as early as age 62. However, you are entitled to full benefits when you reach your full retirement age. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.

Read Also: 5 Things to do When you Retire

If you start receiving benefits early, your benefits are reduced a small percent for each month before your full retirement age.

To find out how much your benefit will be reduced if you begin receiving benefits from age 62 up to your full retirement age, use the chart below and select your year of birth. This example is based on an estimated monthly benefit of $1000 at full retirement age.

1. If you were born on January 1^st, you should refer to the previous year.
2. If you were born on the 1^st of the month, we figure your benefit (and your full retirement age) as if your birthday was in the previous month. If you were born on January 1^st, we figure your benefit (and your full retirement age) as if your birthday was in December of the previous year.
3. You must be at least 62 for the entire month to receive benefits.
4. Percentages are approximate due to rounding.
5. The maximum benefit for the spouse is 50 percent of the benefit the worker would receive at full retirement age. The percent reduction for the spouse should be applied after the automatic 50 percent reduction. Percentages are approximate due to rounding.

Before You Make Your Decision

There are advantages and disadvantages to taking your benefit before your full retirement age. The advantage is that you collect benefits for a longer period of time. The disadvantage is your benefit will be reduced. Each person’s situation is different. It is important to remember:

• If you delay your benefits until after full retirement age, you will be eligible for delayed retirement credits that would increase your monthly benefit.
• That there are other things to consider when making the decision about when to begin receiving your retirement benefits.

9 Signs You Are Not Financially Ready to Retire

1. Struggling to Pay Current Bills

It goes without saying that if you’re struggling to pay your bills with a paycheck from work, retiring won’t make things easier.

As a general rule, retirees may need about 75% of their pre-retirement income to enjoy a comfortable retirement. That income typically comes from Social Security, pensions, 401(k)s, IRAs, and other savings. Will those sources give you enough income to meet your obligations and enjoy your free time?

“Commuting costs and dry cleaning expenses will decrease, but entertainment and travel may increase,” says Marguerita Cheng, CFP^®, RICP^®, and chief executive officer of Blue Ocean Global Wealth in Gaithersburg, MD. In addition, “It’s important to take taxes and healthcare expenses into consideration,” she says.

Your Social Security check may be taxable, depending on your overall income. Most pensions are taxable. Withdrawals from 401(k)s and traditional IRAs will also be taxed.

And without a job, you will not have access to employer-provided health insurance at favorable group rates. If you are 65 or older, you can enroll in Medicare, but Medicare is not entirely free.

2. High Level of Debt

“Large amounts of debt will severely strain your savings once you retire,” says David Walters, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Portland, Ore., office. “If you can, reduce or eliminate credit card payments and car loans. Depending on your situation, paying off your mortgage or downsizing may also help in the long run,” he says.

Paying down debt before you retire might mean working more years than you’d prefer, but it will likely be worth it for the sense of ease that comes with not having all those monthly payments hanging over your head. Getting rid of debt, including your mortgage, also means getting rid of interest payments that can take a toll on your long-term finances.

That being said, it’s tough to know what the best use of your money is when you’re facing a choice between putting that money in your retirement account or paying down debt.

For any loan with an interest rate equal to or higher than what you’re likely to earn in the market—say, 6-8%—you’ll get the best return, and a guaranteed one at that, by paying off your debt. If it’s a choice between paying 3% in mortgage interest (which may be tax-deductible if you itemize) and saving more for retirement, the latter is probably the smarter option, unless you have a poor investing track record.

3. No Plan for Future Major Expenses

“You don’t want to wait until you’ve retired to address major, foreseeable expenses such as replacing your roof, repaving your driveway, purchasing a vacation home, or buying a new car,” says Pedro M. Silva, a financial advisor and chartered retirement planning counselor with Provo Financial Services in Shrewsbury, MA. “These larger expenses can add up, especially when funds are withdrawn from taxable accounts and taxes need to be paid on every dollar.”

“We encourage clients to tackle large expenses before retirement because the impact to their portfolio can be significant,” he says. Suppose you need a new roof ($7,000), a new driveway ($4,000), and a new car ($10,000 down and $300 per month).

“These purchases, which require $21,000 upfront, mean that you have to take nearly $28,000 in pre-tax withdrawals from your retirement account if you’re in the 24% federal tax bracket,” Silva explains. Plus, the $300-per-month car payment will cost you $400 per month in pre-tax dollars, and that could represent a significant chunk of your monthly Social Security income.

4. An Unknown Social Security Benefit

While you might not be relying on Social Security to meet most of your expenses, you shouldn’t ignore it, either.

If you’re like most people and haven’t yet estimated how much your benefit will be, the Social Security Administration offers a handy tool to help you make that calculation.

Walters adds that if you haven’t reached full retirement age for Social Security—the age at which you can collect your maximum Social Security monthly benefit—you might want to postpone retirement until you do.

If you start claiming Social Security as early as age 62, your monthly checks will be 30% smaller than if you wait until you reach full retirement age. If you keep working those four or five extra years, not only will you receive a larger payment each month just for waiting, you might further increase your payment by adding more high-earning years to your benefit calculation. You’ll also, of course, have a few more years of paychecks to squirrel away for retirement.

5. No Monthly Financial Plan

“Once you retire, paychecks stop arriving, but bills keep showing up,” Walters says. You need to map out your monthly cash flow before you retire, he adds.

Planning your monthly cash flow means considering when you will start drawing Social Security benefits and how much you’ll receive, as well as how much you’ll withdraw from your personal retirement accounts and in what order.

If you have both a traditional IRA and a Roth IRA, for example, you have to think about the taxes and required minimum distributions (RMDs) on your traditional IRA withdrawals and how that affects your Roth IRA withdrawals, which won’t be taxed and aren’t subject to RMDs.

Having a monthly plan also means having a solid grasp of your expenses, says certified financial planner Kevin Smith, executive vice president of wealth management for Smith, Mayer & Liddle (a division of Janney) in York, Pa.

Ideally, you should have two to three years of actual spending history summarized by category, and you should analyze each category to determine how it might change during retirement. “Some expenses may go down, such as debts that may soon be repaid, whereas others, such as healthcare costs or travel and recreation expenses, may go up,” Smith says.

Knowing what your expenses will likely be means knowing how much income you’ll need. Once you know how much income you need each month, you can assess whether your nest egg is large enough to allow you to retire, or whether you need to keep working and saving and/or cut your anticipated retirement expenses.

6. No Long-Term Financial Plan

“You should understand how long your savings will last and what spending level you can maintain over the coming decades,” Walters says. “No one knows exactly how long they will live, but expanding lifespans and the increasingly high costs of long-term care may mean your portfolio will have to last longer and stretch further than you once thought.”

There’s a debate about how much you should withdraw from your portfolio each year. The popular 4% rule, which says you can tap 4% of your retirement assets each year, is projected to allow your money to last at least 30 years in most scenarios.

And you do need to plan for your retirement to last 30 years or more, Smith says. “Based on actuarial statistics, for a couple retiring at age 65, there is a 50% probability that at least one will be living at age 92 and a 25% probability that at least one will be alive at age 97.”

Depending on your health, your portfolio composition, and your risk tolerance, you’ll need to come up with a plan for the percentage of your assets you’ll spend each year—which might mean getting help from a professional financial planner.

7. Not Accounting for Inflation

Inflation will affect your day-to-day expenses and the value of your life savings. An inflation rate of 3%, Smith says, which is close to historical norms, would mean your expenses will double in less than 25 years—well within a typical retirement period.

 Overlooking the effects of inflation is one of the most common retirement planning mistakes and can have serious long-term implications if not properly accounted for, he says.

With average lifespans much longer than they used to be, you need to manage your money carefully to keep up with or outpace inflation to reduce your chances of outliving your savings. Treasury Inflation-Protected Securities (TIPS) will preserve your capital by paying enough interest to keep up with inflation and are considered extremely safe because they’re backed by the U.S. government.

To earn investment returns that outpace inflation, look to stocks. Keep in mind that an 8% annual return is really only a 5% annual return after 3% inflation. Avoid keeping too much of your nest egg in cash and cash equivalents, like CDs and money market funds. Their interest rates are so low that you’ll be losing money. In the short term, you might not notice, but in the long term, you could run out of money sooner than you expected.

8. Not Rebalancing Your Portfolio

Taking a passive approach to investing can work when you’re younger and have plenty of years to make up for any market downturns that hurt your portfolio. But as you approach and enter retirement, it can be smart to rebalance your portfolio annually to focus on income generation and asset protection.

The accepted wisdom about how retirees should manage their portfolios consists of diversifying, preserving capital, earning income, and avoiding risk. Diversifying across a variety of asset classes (bonds, stocks, etc.) and industry sectors—healthcare, technology, and so on—helps protect your portfolio’s value when the market declines, since one instrument or asset class might be performing well when another isn’t.

Capital preservation means choosing investments that aren’t too volatile, so your portfolio value doesn’t fluctuate wildly. Dividends from stocks of big, established companies that have a long track record of performing well (or dividends from an index fund or exchange-traded fund made up of such companies) can provide a dependable income stream.

And if you’re diversified and staying away from volatile investments, you’ve taken care of the risk-avoidance objective.

9. Retirement Worries You

“Even if your portfolio is in top shape, you may not be mentally ready to let go of your working life,” Walters says. “Working takes up a lot of energy, and some people may be anxious, rather than excited, to consider months and years of unstructured time ahead.”

If this sounds like you, think about pursuing a “second act” venture, working part-time, or becoming a volunteer for an organization you care about, Walters says. “If you just retire without a plan, however, you can overspend in an effort to combat boredom and run through your savings quicker than you planned.”

Cheng recommends test-driving retirement to gain a sense of how much money you will need and where you would feel comfortable living. It may not be feasible to retire in an expensive city, given your retirement savings and current living expenses. But you can empower yourself by getting clarity on your sources of retirement income and understanding your cash flow.

10. You Still Love Your Job

There’s nothing that says you have to retire just because you’ve reached Social Security’s definition of full retirement age. Just look at Warren Buffett, who’s still working at almost 90 and has no plans to retire. He does it because he loves picking stocks—not to pad his billions in net worth. If you’re excited about getting up and going to work in the morning, keep doing it.

Working has benefits beyond the financial. A job you enjoy engages your mind, offers social interaction, gives your days purpose, and creates a sense of accomplishment. All of these things can help you stay healthy and happy as you age. You also might be able to stay on your employer’s health plan and possibly get better coverage than you would through Medicare.

“The primary sign that you aren’t OK to retire is when you can’t answer the question, ‘Am I OK to retire?’” Smith says. “Retirement is a major life transition that requires ample preparation and planning.”

Sitting down with a fee-only fiduciary financial planner can help you answer the financial aspects of the retirement question, rebalance your portfolio, and, if needed, create a plan to pay down debt and reevaluate your expenses.

It may even help you answer some emotional aspects of the question. Experienced retirement planners can offer insights based on their experience working with dozens of clients who faced the same decision. Ultimately, the decision is up to you.

How much will I get in Social Security if I Retire at age 62?

It depends on when you were born. For example, if you were born between 1943 and 1954, your payouts will be reduced 25% if you start receiving benefits at age 62. That reduction is permanent – that is, the 25% reduction applies not only to the money you collect between age 62 and 67, but all the money you’ll collect for the rest of your life.

Social Security is a government program that collects taxes from working Americans and distributes these funds to qualifying disabled workers, retirees, and their families to help them remain financially secure.

A worker typically must earn 40 credits to qualify for Social Security, though if they die or are disabled young, they may qualify with fewer credits. A credit in 2020 is defined as $1,410 in earned income, and you may earn up to four credits per year.

You may claim Social Security based on your own work record, if you’ve earned enough credits, or you may be eligible to claim spousal benefits based on your current or ex-spouse’s work record if this amount is larger than what you’re entitled to on your own. Dependent children and other family members may also qualify for family benefits in certain circumstances.

When you’re ready to apply for Social Security, you must fill out an application online or at your local Social Security Administration office. A government representative will verify the information in your application to determine if you qualify and then you’ll begin receiving monthly checks.

Types of Social Security benefits

There are three main types of Social Security benefits:

• Retirement benefits
• Disability benefits
• Survivors benefits

Retirement benefits

Social Security retirement benefits are for workers 62 and older who have earned at least 40 credits. The size of your benefit checks depends on your average indexed monthly earnings (AIME) over your 35 highest-earning years, and the age at which you begin benefits.

You must wait until your full retirement age (FRA) to claim your standard benefit based on your AIME. Your FRA is 66 if you were born between 1943 and 1954, then it rises by two months every year thereafter until it reaches 67 for those born in 1960 or later.

If you begin claiming at 62, you’ll get only 70% of your standard benefit if your FRA is 67 or 75% if your FRA is 66. Every month you delay benefits increases your checks slightly until you reach the maximum benefit at 70. This is 124% of your standard benefit if your FRA is 67 or 132% if your FRA is 66.

Receiving Social Security benefits under your FRA could cause you to lose some of that money back to the government if your income is high enough. The Social Security Earnings Test withholds $1 from your checks for every $2 you earn above $18,240 in 2020 if you will be under your FRA all year. If you’ll reach your FRA in 2020, it’ll take $1 for every $3 you earn over $48,600 if you reach this amount before your FRA. Once you’re past your FRA, the government recalculates your benefit to include the amount it withheld.

Certain family members can claim benefits on your work record if doing so would give them more money than they’re eligible for on their own work record. Eligible family members include:

• Spouses
• Ex-spouses, if the marriage lasted for at least 10 years and they have not remarried
• Children under 18, or up to 19 if still enrolled in high school
• Children of any age who were disabled before 22 — that is, not earning more than $1,260 per month in 2020, having a medical condition that results in severe functional limitations and that is expected to last 12 months or longer or result in death

Spouses and ex-spouses must be at least 62 in order to claim benefits, and spouses and children must wait for the worker to begin claiming benefits themselves before they can claim family benefits on their record.

Disability benefits

Social Security disability benefits are available to adults 18 or older who are unable to work due to a physical or mental disability that is expected to last at least 12 months or result in death. You may still be eligible even if you haven’t earned 40 credits, depending upon your age at the time of your disability.

Your benefit is determined by your average lifetime earnings, so individuals who earned more while they were working will receive larger disability checks.

You must provide the government with information about your work history and your medical condition, including relevant supporting documents, when you apply. The Social Security Administration will review your case to decide if you are eligible.

If it rules in your favor, you’ll receive disability checks for as long as your disability lasts or the rest of your life, depending on the condition. If it rules against you, you may request a reconsideration or appeal to an administrative law judge.

Family members may be able to claim benefits on a disabled worker’s work record if they are:

• A spouse 62 or older or of any age if caring for a disabled worker’s disabled child or child 16 or younger
• Ex-spouses who were married to the disabled worker for at least 10 years and have not remarried if they meet the same criteria as spouses
• Unmarried children up to 18, or 19 if still attending high school
• Children of any age who were disabled before 22

Survivors benefits

Survivors benefits are benefits for the family members of deceased workers who qualified for Social Security.

Surviving spouses who are 60 or older (50 or older if disabled) may claim survivors benefits, as can surviving spouses of any age if they are caring for the deceased worker’s child who is under 16 or disabled. The same rules apply for ex-spouses as long as they were married to the deceased worker for at least 10 years and have not remarried.

The deceased worker’s children under 18, or up to 19 if still enrolled in high school, are eligible for benefits, as are disabled children of any age if they were disabled before 22. Parents of the deceased worker may also qualify for benefits if the deceased was providing 50% or more of their financial support before they died.

In addition to these benefits, the surviving spouse or children may be eligible for a one-time death benefit of $255.

Can I Retire at 55?

Having the option to take an early retirement is a really nice thing to have. But is 55 too early to retire? If you want to retire early, you’ll need a solid plan, masterful control over your expenses, and savings outside of retirement accounts. Here’s how you’ll know if 55 is too early to retire.

Perhaps you’ve worked hard and want more free time to enjoy your success. Or maybe you’re wondering if you should take the early retirement package you were offered. Either way, retiring at 55 is considered early. For some investors, it’s too early. But if you’ve been diligently saving and can manage your lifestyle expenses, retiring at 55 could be within reach.

Top five challenges to retiring at 55:

1. Generating income before you can take money from your IRAs
2. Strict rules about 401(k) and IRA withdrawals at age 55
3. Social Security eligibility doesn’t start until 62
4. Paying for health insurance before Medicare eligibility begins at 65
5. Tapping your savings earlier, while shortening your saving years, and extending how long the money needs to last is a challenge

Hands off: Penalty-free (and rule-free) IRA withdrawals don’t start until 59 1/2

Even after you retire, you might still not be able to access money in an IRA without incurring a 10% penalty. Taking an early retirement is not one of the exceptions to the 10% penalty for early withdrawals from a traditional or Roth IRA. So you may need to wait until you turn 59 1/2 to access these accounts.

In addition to reaching age 59 1/2, for Roth IRAs, the account must also have been opened at least five years ago. Though you can always withdraw contributions (just not any growth and earnings) tax and penalty-free.

There is a way to use funds from your IRA before age 59 1/2, it’s just not as flexible as you might like. More on that next.

Taking money from your IRA or old 401(k) at age 55

Substantially Equal Periodic Payments (SEPP) is the option for early retirees to access funds in an IRA or old 401(k) before age 59 1/2 without incurring a penalty. But there are rules.

At a high level, you have the choice of one of three IRS-approved distribution methods. Your required withdrawal is calculated according to the method you selected. You don’t get to decide how much you want to take out and when.

The payments must continue for at least five years or until you turn 59 1/2, whichever is later. If you start a SEPP program at age 55, you’ll be able to stop at 60. Failure to follow the SEPP rules will trigger penalties and interest.

And keep in mind, distributions from traditional 401(k) or IRA are fully taxable as ordinary income. If the distribution is less than ideal, you’ll wind up with even less to maintain your lifestyle.

If you’ve been at your job for a very long time and have a large account, the Substantially Equal Periodic Payments could leave you with little control over your tax situation and force you to take more from your tax-advantaged accounts than you need long before Required Minimum Distributions begin at age 72.

Another option that might be available in some 401(k) plans (not IRAs) is the ability for individuals who retire between age 55 and 59 1/2 to take money from their account after they’ve retired and separated from service.

There is no 10% penalty, but there is a mandatory 20% federal income tax withholding. Also, 401(k) and 403(b) plans aren’t required to offer this provision, so you’ll want to review your plan documents.

55 may not be too early to retire, but it is too soon for Social Security

As you work to navigate the income equation in hopes of retiring at 55, cross Social Security benefits off your list of potential income sources in the short-term. Eligibility for Social Security benefits starts at 62 for retirees.

Also, you’ll want to weigh whether you should file for benefits as soon as possible or hold off for larger checks. This might mean taping retirement accounts to delay Social Security longer, at least after you turn 59 1/2.

Social Security benefits include 35 years of average earnings, so unless you started working at age 20, the Social Security Administration will use $0 salary for the last few years when calculating your benefits.

Health insurance options before Medicare

Unless your spouse is still working and you can join his or her health insurance plan, paying for health insurance on your own may be prohibitive. With Medicare eligibility beginning at 65, what are your options for health insurance if you retire at 55?

In general, early retirees have five options for health insurance before Medicare:

1. Retirement health insurance continuation from your employer
2. COBRA coverage
3. Public exchanges
4. Private insurance exchanges
5. A spouse’s plan 

COBRA coverage generally only lasts for 18 months if you retire early, and you need 10 years. The public exchanges (Obamacare) will usually be more affordable than private insurance, but it’s still really expensive, and the cost varies by state.

According to the calculator from the Kaiser Family Foundation, two 55-year-old adults in Boston, MA would pay a premium of $995 per month in 2020 for a silver plan, assuming they’re not eligible for subsidies. The same couple would pay $1,590/month in Jupiter, FL and $1,359/month in Houston, TX.

To retire at 55, you’ll want savings outside of retirement accounts

Most people want more control over their day-to-day after they retire, not less. The thought of having restricted access to your own retirement savings is probably less than ideal. But no one said retiring early at 55 was easy, right?

You’ll generally have the best opportunity to life the lifestyle you want in retirement and retire early if you have investment assets outside of your retirement accounts. A taxable brokerage account is the most flexible type of investment account.

There is no contribution limit or rules about when you can sell funds and withdraw the cash. In exchange for this unlimited flexibility, you sacrifice the tax-deferred growth and tax deduction you receive with 401(k) or 403(b) contributions. 

But that’s not to say a brokerage account is tax inefficient, either. Long-term capital gains tax rates are much more favorable than 401(k) or IRA withdrawals which are taxed as ordinary income. In fact, a married couple filing jointly with income under $80,000 in 2020 would pay a 0% tax rate on long-term capital gains! 

Figuring out if 55 is too early to retire requires financial planning

At any age, you’ll want to make sure you’ve fully thought through your retirement plan (financially and otherwise) before retiring. Retiring early requires even more planning as the traditional sources of retirement income aren’t available and new challenges, like health insurance, arise. Here are some financial planning tips for executives looking to retire at 55.

Hone in on your expenses

Estimating your expenses in retirement is difficult and some investors actually overestimate retirement spending needs. Whether or not you’re financially able to retire is more about your expenses than your savings. Put another way, what you’re going to spend drives how much you’ll need saved so you don’t run out of money.

Here’s a simple example: 

If your portfolio is $2,000,000 and you need to take out $100,000 per year (increasing 3%/year), you’ll run out of money when you’re 84 assuming a 6% annual return. But if you only needed $80,000/year instead, your income could last until age 96. 

If your lifestyle is relatively inexpensive, retiring at 55 may not be terribly challenging. But being able to retire early gets harder as lifestyle inflation takes over. 

Don’t underestimate how long you’ll live

People are living longer. This means your retirement savings have to last you longer.

Here are some statistics according to data from J.P. Morgan:

• A 62-year-old man has a 61% probability of living until 80 and nearly a one in four chance of living until age 90
• A 62-year-old female has a 71% probability of living until 80 and one in three odds of living until 90
• As a couple, there’s an 89% chance at least one spouse will live until 80 and almost a 50% probability that one person will live until 90 

Put another way, the odds of either you or your spouse living past 90 are roughly 50/50. If you retire at 55, you’ll probably spend more time in retirement than you did working. It sounds nice, but affording it requires lots of planning and a disciplined approach to saving and investing. 

Stress-testing an early retirement plan

The simplistic calculation above doesn’t account for market volatility, taxes, or other changes to your cash flow or expenses that would impact the outcome. For guidance on a complex question that takes your entire financial situation and retirement goals into account, you’ll really want to develop a financial plan with the help of a CERTIFIED FINANCIAL PLANNER™ professional.

Read Also: What is the Magic Number? How much do I Need to Retire?

To feel confident that 55 isn’t too early to retire, your plan should include a Monte Carlo simulation to account for market volatility. A Monte Carlo analysis is essentially a way to stress-test a retirement plan.

In the analysis, also consider the role timing plays in your plan. Expenses are often the highest at the beginning of retirement, but this is also when you’re going to be most exposed to a market downturn. If you can avoid large purchases and overspending at the beginning, your plan will be stronger for it.

Putting everything together in a comprehensive financial plan is often the best way to figure out if you can retire at 55. Even if it’s too early to give you the lifestyle you want, perhaps working for a couple more years will get you there. Running the numbers will help you understand what trade-offs exist and what options best suit your needs and goals.

Conclusion

Many older people can’t wait for the day when they finally call it quits on their careers. Still, constantly worrying about finances isn’t exactly the way to spend your later years. Before deciding to retire, make sure you have the resources to make the most of this exciting new stage of life.