Retiring at 55? 3 Key Things You Need to Know.

For many people, working until their 60s or beyond is inevitable. But if you've been saving for retirement since you got your first full-time paycheck, by age 55, you may be in a place where you can afford to stop working for good and live off your nest egg.

But while retiring at 55 may be a wonderful thing in theory, there are a few traps you risk falling into. Here are some key things to know if you're planning your workforce exit at 55.

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1. You may be able to access your 401(k) penalty-free

The problem with retiring at 55 is that retirement accounts like IRAs and 401(k)s impose a 10% early withdrawal penalty for taking distributions prior to age 59 1/2. But if you're retiring at 55 with a 401(k), you may qualify for an exception.

Thanks to what's known as the rule of 55, if you separate from your employer the calendar year you turn 55 or later, you can generally access that employer's 401(k) penalty-free from that point onward. But there are some nuances to be aware of.

First, the rule of 55 only applies to your current employer's 401(k). If you have money in an old 401(k) or an IRA, you'll typically face a penalty if you take withdrawals prior to 59 1/2.

Also, just because you can access your current 401(k) at 55 doesn't mean you should. The money in your 401(k) gets tax-advantaged treatment. If you have separate investments in a brokerage account, it could make more sense to lean on those first while allowing your 401(k) to keep growing.

2. You might spend a lot on health insurance until Medicare kicks in

Most workers become eligible for Medicare at 65. If you're retiring at 55, you may be looking at a full decade of having to pay for health insurance premiums on your own.

Now, this doesn't have to be a deal-breaker if it's an expense you plan for. But the cost of getting coverage may be more than you've bargained for. And if you're banking on an ACA subsidy to offset your costs, you'll need to make sure your brokerage or retirement account withdrawals won't push you over the income limit for that to apply.

3. You could end up with smaller Social Security checks

At 55, you're nowhere close to being eligible for Social Security. The earliest age you can claim benefits is 62, and you won't get those monthly checks without a reduction until 67, which is full retirement age for people born in or after 1960.

But you should also know that retiring at 55 could lead to smaller Social Security benefits once you're ready to claim them. And the reason boils down to your earnings record.

Social Security takes your 35 highest-earning years into account in its benefit formula. If you don't have 35 years of income on record, you'll have a $0 factored in for each year you didn't work.

Even if you began working full-time in your early 20s, by age 55, you may not have 35 years of earnings. Or, you may have 35 years of wages, but several of those years may be part-time wages that drag your monthly Social Security benefit down.

One thing you may want to do before retiring at 55 is check your Social Security earnings record and see what it looks like. You may decide that working a couple more years makes more sense to lock in larger benefits.

Retiring at 55 may be your dream scenario. And if you've saved well enough to pull it off, you should absolutely chase that opportunity. Just make sure to keep the points above in mind so you're able to approach that decision strategically.

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