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How to save enough to retire at 55

The short version

  • How much money you need to retire by age 55 will depend on your expenses and lifestyle.
  • There are many ways to estimate how much you'll need in retirement, such as the 25x rule, the 4% rule, the 10x rule and more.
  • Use the retirement tools and resources and consider your goals carefully before deciding to retire early.

How much money do I need to retire at 55?

Most financial experts recommend saving enough to replace 80% of your pre-retirement income. How much you will need depends on how much you plan to spend once you’re retired.

In addition to covering your current expenses, you’ll also want to plan for new expenses. Your medical needs will likely increase as you get older. And, depending on where you plan to retire, your baseline cost of living may also go up.

Here are a few strategies to plan for retirement and retire early at 55.

Save 15% of your salary every year

One way to plan for retirement is to save 15% of your pre-tax income each year. Ideally, you should start in your 20s and continue throughout the rest of your working years.

You’ll capture compound interest early in your career if you consistently set aside money for retirement. A 22-year-old who makes $30,000 a year and saves 15% of their monthly income will have $500,000 saved up by the time they reach 55.

The 10x rule

Another simple strategy is the 10x rule. According to this rule, you multiply your current salary by 10 to get an idea of how much money you need to last through retirement. This is a good starting point, especially if you plan to retire at 55. However, it would help if you considered your specific needs to create a more comprehensive retirement strategy.

What might this look like? If you make $100,000 or higher, you’ll need to plan on socking away at least $1 million. This strategy is a useful barometer to gauge how close you are to your goal.

The 25x rule

The 25x rule is an easy way to plan for retirement based on your expenses. Multiply the amount of money you plan to spend each year by 25, and that's how much you need to save.

For example, if you currently spend $100,000 a year, you will need $2.5 million saved for retirement. Conversely, if you only spend $25,000 a year – and plan to continue in retirement – you can retire early with only $625,000 saved up.

You have a lot of control over how much money you spend and your lifestyle. Living below your means and using this approach with an income-based strategy can give you a clear target to shoot for.

The 4% rule

The 4% rule gives you a “safe” amount to withdraw yearly during retirement. In theory, if you withdraw no more than 4% annually, you’ll be able to cover your living expenses without touching the principal balance of your investments because, historically, the stock market has provided returns of about 8%.

Some experts caution that with high inflation, it's safer to withdraw 3% per year. Other experts think that 4% is too conservative and 5% is a more useful number, so you'll have to do your own calculations and determine what you're comfortable with.

FIRE approach

The FIRE (Financial Independence, Retire Early) movement is a financial philosophy that encourages people to save and invest as much money as possible to achieve financial independence and retire early.

Individuals taking the FIRE approach strive to live off 25-50% of their income and save the rest. You can benefit from compound interest if you start FIRE early in your career. Depending on how aggressive you are with your savings and investments, you might be able to retire at 55 (or sooner).

The FIRE movement has gained popularity in recent years, thanks partly to the rise of social media and blogs documenting people's journeys to FIRE. There are many different approaches to consider (Coast FIRE, Fat FIRE, Barista FIRE, etc.). gin

The pros and cons of early retirement

Having enough money set aside is only one part of planning for retirement. The other thing you will need to consider is how you plan to spend your time and whether retiring early is actually necessary.

One benefit of early retirement is travelling and pursuing your interests while you’re still in good health. It's more likely that you'll have health concerns if you retire at 65 or later.

Early retirement can also free up time to work on projects you’re more passionate about. That could be anything from volunteering to starting a small business. When you no longer have to clock into a job, you can spend your time doing things that enrich your life.

There are some significant downsides to retiring early that you must consider. If you plan to retire before 59 ½, expect to pay a 10% early withdrawal penalty on a Traditional IRA or your 401(k). There are some strategies you can use to mitigate this but be prepared to pay penalties if you dip into non-Roth retirement funds early.

Retiring early can also put you at risk if economic conditions change. An increased cost of living or an economic downturn could force you out of early retirement. Unfortunately, ageism can make it harder to find a job as you get older.

How to save enough to retire at 55

When it comes to saving for retirement, the sooner you start, the better. Even if you’re only getting started today, that is still better than not starting at all; here are some tips you can use to begin saving for retirement.

1. Determine your retirement expenses and timeframe

Develop a plan for your current and future expenses. Identify how much you spend now and project how much you plan to spend when you retire.

Healthcare is a significant expense to consider. You'll have access to Medicare when you turn 65; however, if you retire at 55, you’ll need coverage in the interim.

You might also want to consider where you live as part of your retirement expenses. Living in a state without income taxes or moving abroad helps many retirees stretch their dollars.

For some would-be retirees, expenses may go down in retirement since they will no longer have to make mortgage payments. However, retiring early might mean you have more retirement years where you have to make those payments.

Start looking at your needs and how your expenses will change when you retire. Begin planning for your target retirement date by cutting costs, increasing your income, and aggressively saving toward that goal.

As a general guideline, multiply your current salary by a specific number depending on your age to get the total amount you should have in your retirement savings at any given time.

Fidelity recommends saving a minimum of:

  • 1x your salary by 30
  • 3x your salary by 40
  • 6x your salary by 50
  • 8x your salary by 60
  • 10x your salary by 67

While not perfect, this is another simple way to gauge whether or not you’re on track for retirement based on age. Of course, if you want to retire early, you'll have to have the maximum of 10x your salary saved before you retire.

2. Use a retirement calculator

A retirement calculator is an easy tool you can use to identify whether or not you are on track to retire at 55. If you aren’t, it can tell you how much more you’ll need to save every month to make that happen. Fidelity offers a host of tools to help you make your calculations.

Many employer-sponsored retirement plans offer retirement calculators that sync up with your employer’s retirement offerings. Use them to see whether or not you’re on track and what you might need to do to catch up.

More: Best retirementt planning tools & calculators for 2022

3. Consider your saving/investing options

When planning for retirement, you’ll want to be strategic about how you save your money. Stashing away your savings under the mattress or in a low-interest savings account might not be the best way to help you reach your goals.

You probably have an employer-matched 401(k) plan or a Traditional IRA. While these are great ways to save for retirement, there are drawbacks. You don’t pay income taxes on the money you deposit, so you’ll pay income taxes when you withdraw. Additionally, early withdrawals are penalized.

Roth IRA, on the other hand, is a tax-sheltered retirement account. That means you pay income taxes on the money you put into it now rather than when you retire. Anything you earn from investments made in a Roth IRA account is also earned tax-free.

This is why many early retirees use a Roth Conversion Ladder to avoid taxes and penalties. A Roth Conversion Ladder is a multi-year strategy where you roll over an employer-sponsored 401(k) into a Traditional IRA and then convert the Traditional IRA into a Roth IRA.

While you are taxed on the conversion, you won’t be penalized for early withdrawals from the Roth IRA. This is a popular loophole for early retirees who want to draw on their savings before age 59 ½.

Bottom line

While far from mathematically precise, these strategies can help you develop a plan to retire by 55. Different approaches to cutting costs and increasing savings will set you on a path to reach that goal.

Retiring early isn't for everyone. Aside from the financial preparation side of things, some people might get bored and miss the challenge of work. An alternative could be to take a break or sabbatical to travel, work part-time, or get a less demanding job until age 65.

Whatever you decide to do, the best time to start saving for retirement is now. So take a look at the retirement calculators above and get started on your retirement goals.

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Amanda Claypool Freelance Contributor

Amanda Claypool is a writer, entrepreneur, and digital nomad. She writes about wealth, blockchain technology, consumerism, and the future of work


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