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Why Retiring at 55 is Better than 65 (The "3x" Rule)
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Retiring at 55 is not just retiring ten years earlier. It changes the entire math of your life.
From 55 to 65, expenses are often at their highest. You are covering healthcare before Medicare, traveling more, and living fully. At the same time, Social Security has not started. Everything comes from your portfolio. On paper, that can feel uncomfortable. Withdrawal rates look high. The numbers can scare you.
But that spike is temporary. Once Medicare and Social Security begin, the pressure on your portfolio drops dramatically. The mistake many people make is evaluating retirement as if every year must look the same. It will not. The early years are different, and planning for them requires intention, not fear.
There are also powerful tax decisions available in that window. Roth conversions, capital gain strategies, and income management for health insurance subsidies all compete for priority. You cannot optimize everything at once. The right move depends on how your assets are structured and what future taxes may look like.
And then there is the part that does not show up in a spreadsheet. Your highest energy years are limited. Waiting from 55 to 65 does not just shorten retirement. It compresses the healthiest, most active chapter of it. Ten years earlier can mean tripling the time you have in your true go go years.
The question is not simply whether you can afford to retire at 55. It is whether you can afford not to examine the opportunity carefully. Retirement planning is math. It is also life. When those two align, the decision becomes clearer.
Learn the tips & strategies to get the most out of life with your money.
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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
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What's The Difference Between Retiring At 55 VS Retiring at 65
SPEAKER_00Retiring at 55 is fundamentally different than retiring at 65. If you've built a significant nest egg, the question isn't can you survive? It's can you bridge that tenure gap? At 65, you have Social Security and Medicare. At 55, you have neither of those things. So today we're exploring how your withdrawal rate should not be a flat line over the course of your retirement, how to prioritize different tax strategies in those early years, and the risk of retiring too early, but also what happens if you retire too late. The first mistake people make here is they assume that retirement expenses are linear. They aren't. Between 55 and 65, your expenses will most likely be at their peak. You're both paying full price for healthcare, and also because you have your time and your energy, you're likely maximizing travel and lifestyle expenses as well. And it's not just this. While expenses are the highest they're ever going to be, your income is likely the lowest it's ever going to be. Social Security hasn't kicked in. If you're eligible for a pension, it likely hasn't started yet. Everything that you pull out to live on has to come from your portfolio. So you have this combination of higher expenses and lower non-portfolio income sources that creates a perfect storm that if you don't have a plan for can derail the entirety of your retirement. So I'll get a quick example to illustrate what I mean. Let's assume that your core expenses are$70,000 per year. That's what you need for property taxes, for groceries, to pay the bills,$70,000 per year. Now that's going to last all the way through retirement. Sure, inflation is going to take that number higher, but$70,000. Now, from$55 to$65, you're also on the hook to pay for the entirety of your healthcare premium for you and a spouse. Let's assume that's another$25,000 per year or slightly over$2,000 per month. Now remember, you retired at$55,000 not to go sit on the couch, but because you want to do things. So we're going to budget in an additional$25,000 per year for the travel and the lifestyle that you're going to live at that point. You add all those up,$70,000,$25,000,$25,000. You're looking at$120,000 per year of expenses at that point in time. So those are your expenses from$5,000 to 65. But let's look what happens from age 65 and beyond. At age 65, Medicare kicks in. So now your healthcare expenses go from$25,000 per year down to$10,000 per year. At age 65, you're still traveling, but not quite as much as you were from$5,000 to 65. So now your travel expenses cut to$10,000 per year. Now your core expenses, those remain the same. Nothing changes about that. But your total expenses go from$120,000 per year, which is what they were from age 55 to 65, to$90,000 per year, which is the$70,000 of core expenses plus$10,000 for travel plus$10,000 for healthcare. So you start to see how expenses have dropped fairly dramatically here, but that's not in the entirety of the picture. Let's assume that you and your spouse start collecting Social Security at age 65 as well. In between the two of you, your benefit is$60,000 per year or$5,000 per month combined. Well, what does that mean? It means that from$65 and beyond, your portfolio only needs to generate$30,000 per year to supplement Social Security and give you the full$90,000 per year to live on. Contrast that, the needing$30,000 per year from age 65 and beyond to those first 10 years of retirement. If you want to spend$120,000 per year, the entirety of that has to come from your portfolio. Here's the challenge that this creates, both practically speaking as well as emotionally, when it comes time for retirees to actually pull the trigger. If you have a$1.5 million portfolio going into retirement to support this, what that means is you would need to withdraw 8% per year of$1.5 million portfolio to support$120,000 per year of expenses. I know I'm not factoring taxes into this. I'm trying to keep this example very simple just to illustrate this point here. 8% per year withdrawal rate. Now contrast that to if you have that same$1.5 million still at age 65, you'd only need a 2% per year withdrawal rate to support the$30,000 per year of living expenses. So what practically happens when people run into this exact situation? Well, practically speaking, people aren't looking at the entirety of their plan. And this is why it's so important to have a financial plan when you retire. They look at their portfolio, they look at how much they need to take out, and then say, my goodness, I need to pull 8% per year. I don't think I can do it. I'm only supposed to take 4% to 5% out per year, and this number is significantly higher than that. Well, that might be the case, but this is why it's so important you need to look at the big picture. You're not taking 8% out forever. Taking 8% out forever is not a sustainable withdrawal week. You should absolutely not plan to be able to do that during your retirement years. What if that 8% doesn't last? What if that 8% is only for a limited period of time? How does that start to change things, especially considering you only need 2% per year from ages 65 and beyond? So, this of course is where that importance of planning comes in is you cannot look at any single year withdrawal rate. Most years are either going to be higher or lower than that perfectly sustainable amount that you might want to start with. But understand the big picture. Do you have enough in your portfolio to take you through those years where your withdrawal rate is higher, knowing that there's going to be a drawdown or a lessening of that withdrawal rate in the future years? That's the first thing to understand. The second thing to understand is this when you retire, you're going to have the opportunity to take advantage of one of three very impactful tax strategies. Number one is Roth conversions. Number two is tax gain harvesting. And number three is qualifying for health insurance subsidies. So how do you prioritize these? Because you can't do all of them. If you take advantage of Roth conversions, you're not going to be able to do tax gain harvesting. If you keep your income low to qualify for health insurance subsidies, you're likely not going to be able to take advantage of long-term capital gain rates at 0%. So which do you prioritize? Well, it very much depends on the makeup of your assets. If all of your assets or the majority of your assets are in non-retirement accounts, you probably don't need to prioritize Roth conversions. Roth conversions are typically the thing you're going to prioritize when you take a look down the road and your future tax bill is projected to be much higher than it is today because of required minimum distributions. If you just keep letting your IRA balloon and keep growing, the required distributions might push you to a tax bracket you don't want to be in. If you don't have much in your IRA, no need to prioritize that. What if all of your money isn't an IRA or the majority isn't an IRA? Well, that is probably a thing that you're going to want to prioritize because of those same required minimum distributions. But also keep in mind tax gain harvesting, that's a concept of understanding that at the federal level, there are long-term capital gain rates for investments that you've owned for over one year. Those capital gain rates are either 0%, 15%, or 20%. Obviously, if we can take advantage of the 0% tax rate, that's exactly what we want to do. So there's a threshold. And if you don't realize gains, or if you don't have total taxable income above that threshold, any gains that you realize are completely tax free at the federal level. That is something that you might want to prioritize as well. Versus health insurance. We already talked about the fact that health insurance is going to be one of the biggest expenses you have between 55 and 65. So are there things you can do to keep that expense minimal by keeping your taxable income levels under certain thresholds? So you're not going to be able to do all three every single year, but understanding which to prioritize and in which years could be the difference in tens or hundreds of thousands of extra dollars added to your plan over the course of your lifetime. Now, the last point I want to make about this is probably the most important point is sometimes people get so obsessed with what we just talked about. What is my withdrawal rate gonna be? How do I protect against sequence of return risk? How do I optimize my taxes? Those are all very good things to do. But here's a problem. When that becomes the entirety of your focus, you keep telling yourself, well, I'll work one more year. I'm not gonna retire at 55, maybe it's 56. You know, it's not 56, it's probably 57. You know what? I'm already close to 58, let's just work one more year. And by the time you do that, you're doing that because it's making the financial side of the equation look much better. But here's what you're missing. You're missing out on some of the best, highest quality, high energy years of your life. By continuing to push that back because the financial side of things has to do so, what's it costing you on the personal side? In fact, the only side that actually matters at the end of the day. Your go-go years are typically thought of as your years up until age 70. It's when you have your time, your energy, your faculties to be able to fully enjoy what life has to offer. So what happens when you don't retire at 55 because you're too afraid to, and instead you retire at 65? Well, you might look at that and say, that's only 10 more years of work, and I still have a 25 plus year retirement. Well, what you've done is you've compressed your go-go years from 15 years to five. What would life look like if you could triple the length of time you have to fully enjoy travel, to fully enjoy your health, to fully enjoy your energy and quite frankly, the health and energy and livelihood of the people around you, knowing that the older you get, not only can that not be guaranteed for you, but it can't be guaranteed for those around you. So take advantage of that time. Not only is retiring at 55 versus 65 giving you 10 more years of total time, it's tripling the time that you have in those peak years, the years where you can actually fully do and fully enjoy and fully experience what it is you're trying to actually accomplish. So keep that in mind. And then let me add one thing to this. What holds people back? You know, people hear this and they know on their heads, they know, yes, I should be retiring, I should create a plan, I should be experiencing what life has to offer. Why don't people do it? Well, number one, they don't have a plan. Most people's plan is this make more money. If I make more money, I'll feel better. If I save up more money in my 401k, I'll feel more confident. If I pay down my mortgage, if I do this, I'll feel confident then. That will never happen. If you have$2 million, you think that at$1 million, you'll magically feel more confident and more secure. Well, take a step back. If you're feeling that at$2 million, go back to$1 million. Because I know at 1 million, you're telling yourself that once you get to 2 million, you'll feel a lot more confident than you do now. Is that the case? No. And it's not because whatever number you're at today just becomes the new normal. And you keep telling yourself, you rationalize, I don't need to have a plan, I just need to make more money. And so 2 million turns to three, three million turns to five, five million turns two, you can fill in the blank. So making more money isn't going to magically get you to this place where you feel confident in what you can do. That can only be accomplished by a plan. And when I say plan, I don't mean a Monte Carlo summary. I don't mean a piece of printout that's 30 pages long telling you all these things. What a plan should do is a plan should start with what are your personal goals and values? What do you actually want to accomplish? Then how do you create income to support that? That can come from Social Security, from pension from your investments. It doesn't matter where it comes from, but do you have the pieces in place to support that income that will support that vision? Then how do you allocate your investments? What's the right asset allocation today and in the future to create that income to fulfill that vision you have for your retirement? Then there's a tax piece of how do you optimize your taxes to support everything around you. Then there's a security piece that's making sure your estate plan, your insurance strategies is in place to protect what you have. That's what a plan is. By the way, that's exactly what we do all day, every day at Root Financial. If that's something you're looking to do, you can click on the link below, go to our website to see how we do that for clients just like you. But start with a plan. You need to have a plan. The second thing that holds people back from actually doing this, and this is gonna sound weird to a lot of people, is financial advisors. If you're watching this video and you have a financial advisor and you have a probability of success, your Monte Carlo score is at 98 or 99, and you're saying, no, my advisor tells me it needs to be 100, you have the wrong advisor. A Monte Carlo score in the high 90s and even 100%, that's not a fail-safe plan. That is a plan that's guaranteed to fail. What do I mean guaranteed to fail? Well, what I mean is you are being far too conservative. You are optimizing the numbers above life. I've seen so many clients come to us from an advisor, and these clients were terrified to do anything because their Monte Carlo score wasn't yet 99% or 100%. And I could not wait to break them free of that plan and say it does not need to be 99 or 100%. And you need a very high degree of success. But more than anything, we just need to know what are the contingencies. What are we gonna do when the market drops? What are we gonna do when inflation is higher than we expect it to be? What are we gonna do when the next crisis happens? You don't need a 100% probability of success. You just need contingencies. But here's the dirty secret: too many advisors push their clients to keep working, to keep saving, to keep growing that Monte Carlo score, because doing so is directly impacting the advisor's compensation. Of course, an advisor wants you to do that. They get to retain more assets, they get to charge more fees. You're not spending what you actually worked for. That is not how it should work. If your advisor does not have the same philosophy that you have, of you want to get the most out of life with your money, not just accumulate money until you die, you need to make sure you're finding a new advisor. Whether you're doing that on your own or you're working with someone else, unfortunately, one of the biggest things preventing people from actually enjoying their money, from making this decision, from making this jump when they want to, is an advisor that's telling them they should work one more year. An advisor that's telling them they should save a little bit more. An advisor that's telling them it'd be foolish to walk away from your peak earning years and keep saving these massive bonuses or stock compensations vesting. So understand when is it time for you to walk away? Yes, there's a financial component, but there's also part of this that just says it's time to start living and stop chasing some arbitrary number. Then, number three, the third thing that holds people back is fear. This can be a scary thing to do. Fear is not a bad thing. I want you to feel fear, but I want you to feel a healthy fear. So, what's a healthy fear? It's a fear both of what you're looking at of what if the market drops, what if something happens, what if I'm undersaved. It's a good fear to have. It means that we're gonna properly plan and prepare for that. But I also need you to have this fear. What happens if I don't walk away now? What happens if I optimize the next five to ten years of my life financially, fully addressing these fears? But I'm not nearly cognizant enough of the fear of these are the best years I might ever have. These are the years when I have my health, when I have my spouse, when I have my friends. None of that is guaranteed forever. So there has to be a healthy fear that those years aren't guaranteed either. And if those two healthy fears can maintain tension with one another, it's gonna allow you to see things much more clearly because of those checks and those balances. But at the end of the day, retiring at 55 is probably a lot more possible for you than you originally thought. It requires that you look at the math differently, but it also requires that you look at life differently. How do you use the finances, use the numbers to support whatever it is you want your life to look like? If we can help, reach out to us at rootfinancial.com.
