Hoping to Retire in Your 50s? 3 Reasons That Plan Might Backfire

A friend of mine in his mid-50s is retiring this year. He's had it with work and is feeling burned out. And he wants to enjoy retirement before, as he puts it, he's too old to get out and do things.

Thankfully, this is something he's been planning for a while. And being single without kids helps financially, as he's free to spend all of his money on himself.

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The idea of retiring in your 50s might sound appealing to you, too. But here are three reasons you may not want to do it.

1. You may not have enough savings -- even if you've saved a lot

When you retire in your 60s, it's a good idea to plan on having your money last 30 years. When you retire in your 50s, you need to add to that timeframe. And that could seriously limit the amount of money you're able to withdraw each year without upping the risk of running out of money.

Say you're sitting on $2 million. The popular 4% rule would result in about $80,000 of annual income with a nest egg that large.

But the 4% rule may not be appropriate for someone retiring in their 50s. If you stick to it so you're able to withdraw a comfortable amount from your savings, your nest egg may not last as long as you need it to. And if you limit yourself to, say, a 3% withdrawal rate, that's only $60,000 in annual income, which may not give you the lifestyle you want.

Remember, too, that if you retire in your 50s, you won't be old enough to collect Social Security. So whatever amount you withdraw from your savings may be your sole income.

2. You may not be able to access your savings penalty-free

Saving for retirement in a 401(k) or IRA gives you access to tax breaks as you're building up wealth. But you'll typically face a 10% early withdrawal penalty for taking distributions from one of these accounts before age 59 1/2.

There can be exceptions for 401(k) plans. If you leave your job the year you turn 55 or later, you may be able to take penalty-free withdrawals from the 401(k) plan sponsored by the employer you're parting ways with. Otherwise, you might run into problems if the bulk of your money is in an account you can't touch without a penalty.

3. Health insurance costs might be more than you've bargained for

Medicare eligibility begins at 65 unless you have a specific health condition that gives you that coverage sooner. If you retire in your 50s, you may end up having to go many years without Medicare or subsidized insurance. And that could put a huge strain on your finances.

If you happen to be married and have a spouse whose insurance plan you can join, that might solve the problem. But going without health coverage is a huge mistake. A single hospital stay could be financially catastrophic in the absence of insurance. So it's an expense you'll need to factor in. And you may find that it upends your budget in a serious way.

There are clear benefits to ending your career while you're still in your 50s. But keep these pitfalls in mind before you commit to that timeline in your head. You may decide that instead of retiring in your 50s, you'll spend that decade working a less demanding job or doing something you love. That way, you can continue to earn money and, just as importantly, retain health coverage to help bridge the gap until Medicare becomes available.

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