Retiring Early: A Complex Decision
Retiring at 55 is a goal for many Americans, but it’s not always as simple as it seems. Suze Orman, a renowned financial expert, recently met with a 48-year-old single mother named Megan on her show ‘How Am I Doing?’ Megan hopes to retire at 55, driven by her father’s untimely death at 66, just two months shy of retirement. However, Orman’s analysis revealed that Megan’s retirement readiness is not as prepared as she thinks.
When it comes to retirement readiness, Megan gives herself a grade of B-minus, believing she could save a bit more. However, Orman’s calculations resulted in a different conclusion: a D-minus. Still, Orman assured Megan that there’s a way she can earn an A without much effort on her part.
Breaking Down the Numbers
Planning when to retire is a conundrum for many Americans. The traditional retirement age is widely considered to be 65, but it’s an arbitrary number. Not everyone wants to retire at 65, and many end up retiring much earlier, sometimes by choice, sometimes not. According to a survey from the Transamerica Center for Retirement Studies, the average American retires around age 62. Only 14% of retirees say they actually retired at 65, while one in three (31%) retired past the age of 65, including 8% who don’t intend to stop working.
Megan’s situation is a perfect example of the complexities involved in retiring early. She has $864,000 in retirement savings, $344,000 in investments, and $23,000 in an emergency fund. Her home is worth $285,000, and she has $92,000 left to pay on her mortgage. She’s almost paid off her car, with about $1,500 left on her car loan. That gives her a net worth of about $1.4 million. However, after crunching the numbers, Orman would give Megan a D-minus on retirement readiness, that is, if Megan wants to retire at 55.
Why Retiring Early Might Not Be the Best Option
Retiring early means you could miss out on your peak earning years, as well as the ability to make catch-up contributions to your retirement accounts, which could boost your savings even further. If you’re 50+, you can make a catch-up contribution of $8,000 to your 401(k) or 403(b) in 2026. And if you’re aged 60 to 63, you can contribute an extra $11,250. You can also contribute an extra $1,100 to your IRA (traditional or Roth) on top of the $7,500 annual limit.
If you retire early, you’ll also have to pay for private health insurance before Medicare kicks in at age 65. With an average U.S. lifespan of 79 years (76.5 years for men and 81.4 years for women), early retirement means you might need to stretch your savings over 30 years or more.
Orman’s Advice to Megan
Orman told Megan that if she wants to retire at 55, she’ll need to make significant changes to her retirement plan. However, if she works until age 62, she’ll be able to earn an extra million dollars. To break it down into monthly retirement income, that means $4,200 a month of after-tax income versus $2,500 a month. And that’s before Social Security is added into the mix.
Deciding When to Retire
Deciding when to retire can be a tough decision. A common rule of thumb is to save 10 times your pre-retirement income by age 67. However, this depends on your annual income, current savings, and desired retirement lifestyle. If you tap into traditional retirement accounts such as 401(k)s and IRAs before age 59½, you’ll face a 10% early-withdrawal penalty, in addition to taxes.
However, the IRS’s ‘rule of 55’ means you could tap into your current 401(k) or 403(b) without penalty, but only if you’ve been laid off, fired, or quit the year you turn 55. This only applies to your current plan, not plans from previous employers. The earliest you can claim your Social Security retirement benefit is age 62, though you’ll receive a permanently reduced benefit, by up to 30%. If you wait until your full retirement age, you’ll receive 100% of your benefit, and if you wait even longer — up until age 70 — you’ll get an annual bump of 8%.
Ultimately, deciding when to retire requires careful consideration of your individual circumstances and goals. It’s essential to sit down with a financial advisor to crunch the numbers and determine if you really can afford to retire early. It might mean working a few more years, but it could make a significant difference in your retirement income — in Megan’s case, a million-dollar difference.
