Retiring at 55: How a CFP® Is Actually Investing for It

Retiring at age 55 presents several challenges that don't apply if you work until a traditional retirement age of 65 or later. For example, you have to figure out how to fund your healthcare needs for a 10-year gap before Medicare eligibility. And not only does your money need to last 10 years longer in retirement, but you'll have to rely exclusively on your savings in the years before you claim Social Security, and you may not even be able to access certain retirement accounts.

Let me be perfectly clear. I don't necessarily want to retire at 55. I want to be able to retire at 55. That's a difference. I'm one of the lucky people who truly enjoy what they do, and I hope to be doing this for many years to come. But I'm a Certified Financial Planner® and would love to be in a position to have true financial freedom by the time I reach 55.

With that in mind, here's how I'm planning my accounts, asset allocation, and more to hopefully reach that point a decade before the typical retirement age.

Image source: Getty Images.

Money access problems and how I'm solving them

As mentioned, accessing your retirement savings can be a big challenge. In most cases, if you withdraw money from a 401(k) or IRA before you reach age 59 1/2, you'll pay a 10% penalty. But if you plan to retire early, there are two key exemptions to know about:

• Roth IRA contributions: If you have a Roth IRA, you are free to withdraw your initial contributions, but not any investment gains, at any time and for any reason. In other words, if you've contributed $80,000 to your Roth IRA over the years, you can tap into that money if you retire early.
• Rule of 55: When I said, "retire at 55," that wasn't just an arbitrary number. There's an exception that allows penalty-free withdrawals from an employer's 401(k) if you leave in or after the year after you turn 55 (known as the Separation From Service exemption). This does not apply to IRAs or former employers' 401(k)s, but if you have a 401(k) through your current employer, keep this in mind.

For many people, a taxable brokerage account is the best tool you can have to set you up for an early retirement. You can withdraw money at any time, and while you don't get the same tax advantages of an IRA, long-term gains get favorable tax treatment.

So, how am I preparing? I have a taxable brokerage account that I aim to grow to cover 4 ½ years of living expenses (between 55 and 59 ½) over the next decade. I also have a modest amount in a Roth IRA that I can use to supplement this account if needed.

How I'm invested for early retirement

Even though I want to be financially able to retire in 11 years (I'm 44 now), I'm still very much in growth mode. I don't have too much of my money in fixed income, although my CFP® textbooks say I should have about 30% in bonds. Most of my invested assets are in stocks and stock-based funds. Specifically, here's my approach:

• Low-cost index funds: The backbone of my portfolio, which should generate strong wealth creation over the long term without much single-stock risk. Some of my largest ETF holdings include the Vanguard S&P 500 ETF (NYSEMKT:VOO), Vanguard Real Estate ETF (NYSEMKT:VNQ), and the Vanguard Russell 2000 ETF (NASDAQ:VTWO), which gives me small-cap exposure.
• Income stocks: Part of the reason why I don't have much of my money in fixed income is that I have quite a bit of real estate investment trusts (REITs) and other dividend stocks. I focus on dividend growth companies like Realty Income (NYSE:O) and IBM (NYSE:IBM), both of which have raised their dividends for 31 consecutive years.
• Other stocks: I also own about 20 non-dividend stocks at any given time, and this represents the more growth-oriented part of my portfolio. Top holdings in this category include Mercadolibre (NASDAQ:MELI) and SoFi (NASDAQ:SOFI), but it's a pretty diverse group.

One big change I plan to make between now and when I reach 55 is to build up a cash cushion that covers one to two years of expenses. This way, if the market crashes shortly after I choose to retire, I won't have to sell any stocks at depressed prices to fund living expenses.

Finally, if you're planning to retire early without sacrificing your standard of living, you'll need to save rather aggressively. The standard guidance generally calls for saving 10% of your income, not including any employer contributions. I've been saving about 20% of my income for retirement for years and plan to keep up this aggressive cadence.

Matt Frankel, CFP® has positions in International Business Machines, MercadoLibre, Realty Income, SoFi Technologies, Vanguard Real Estate ETF, Vanguard Russell 2000 ETF, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends International Business Machines, MercadoLibre, Realty Income, Vanguard Real Estate ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.