A Comprehensive Guide on the Rule of 55
by Ankita Tripathy Finance 16 December 2024
Retiring early using the rule of 55 retirement savings plan is a great way to manage your finances and retire with enough cushion. However, it also means that you need to understand complex concepts. Thankfully, we are here.
We did all the legwork and found all the necessary information that you might need in order to understand the rule of 55 inside out. Hence, if you are looking for more information on the topic, you have come to the right place.
So, let us start our journey without any further dilly-dallying.
Retiring Early
Imagine sipping a Daiquiri at your favourite beach at the age of 40 and not having to go to work since you have retired early, along with a lot of money. Sounds like the perfect retirement plan. However, it might sound unrealistic, but it is not.
Retiring early is a real thing, and it has some significant benefits. However, you cannot just do it on the fly. In fact, you need to understand that it requires clear understanding and some prep work.
Therefore, let us analyze the rule of 55 and see what early retirement is and how it can help you attain financial freedom.
Pros vs. Cons of Retiring Early
Retiring early is something we all want to do. We definitely only want to keep working once we are 80 years old. As a result, early retirement is something we all hope and pray for at some level.
However, this is not a decision that you should be taking on the fly. There needs to be some rhyme and reason behind it. For this, you need to understand the pros and cons behind it. In this section, we will be looking at the pros and cons of retiring early.
Let’s go!
Pro #1
Retiring early has actually been proven to be good for your health. Studies show that people who retire early usually end up with better health. This is primarily because work stress is one of the biggest and most brutal forms of stress that is out there.
Therefore, if you retire early, you are automatically lowering your chance of running a health risk. Studies show that you can reduce the risk of diseases like hypertension, cardiac arrest, etc.
Con #1
Just as there are health benefits, in the same way, studies show that there are detrimental factors as well related to personal finances. Just as there are studies that show that early retirement is good for your heart, there are other sides to the story as well.
Studies show that early retirement without proper channelizing can actually be detrimental to overall mental health. In other words, an idle mind can really affect one’s psyche, and people have reported feeling suicidal, depressed, and a general lack of purpose.
Pro #2
People who retire early have more time on their hands to travel the world. This is one of the most significant and most notable benefits of retiring early. If you plan on retiring early or following the rule of 55, you will have enough time to travel.
Imagine taking a two-week hiatus from life on a tropical beach or a trekking trip to Bali. Therefore, if you retire at an optimal age, you get to do all of these things when you have the strength to do so.
Con #2
Social security benefits are an essential part of growing old. These benefits are government-sanctioned benefits that the older population of America banks on. However, social security benefits are calculated upon the duration of your working career.
As a result, if you plan on retiring early, you need to understand that this percentage would also be lower. Therefore, if you retire early, remember to collect a lighter social security benefit.
Pro #3
Many people tend to do a job only for the sake of financial viability. If this is your case, then you can retire early and start pursuing the thing that you want to pursue. This is an essential aspect of retiring early.
Take an early retirement and do what you always wanted to do. This will help you become financially independent and viable in the long run. Hence, you can finally own that small pub on the beachside, like you always wanted.
Con #3
Retirement is perfect, but the thought of returning early without money can be a scary ordeal. Therefore, ensure that you are not that. You need to make sure that you have enough money for retirement.
This is one of the most significant and most prominent aspects of retiring. Therefore, you need to ensure that you have a fixed stream of income in order to sustain your life. With lowered Social Security benefits, you will already be in the fix.
Introduction to the Rule of 55?
With the basics of the Rule done, let us take a moment to understand what the rule is of 55. The rule of 55 is primarily an IRS provision set forth by the government that ensures the even distribution of resources.
This is what the Rule of 55 does for you. It evenly distributes the resources as per the requirement of the person. This IRS provision is primarily put into place by employers. The provision allows businesses to allocate their resources effectively.
The rule of 55 is an age-based resource distribution. Therefore, you need to understand that the essential requirement is that you must be at least 55 years of age. However, there are other things that you need to remember.
Factors to Know About the Rule 55
The rule of 55 is IRS sanctioned retirement plan that you can use in order to redistribute your resources for your old age. However, before you can do so, you need to understand some key factors regarding it.
Here are five factors that you must remember if you are planning on getting a Rule of 55 plan. You need to remember these points if you want to know more about this retirement plan.
Factor #1
Police officers, EMTs, and firefighters fall under the public safety employee plan. As per the regulation, people qualifying under this plan will get an extra five-year extension. This means if you fall under the aforementioned category, you will get an extra five-year extension. In other words, you will be able to access the benefits five years earlier.
Factor #2
The withdrawal of this plan is purely subjective to the plan. Unlike other retirement plans, the rule of five is a contextual plan. You can only withdraw if you have the necessary documents or if you have fulfilled the requirements. However, your other retirement plans will be intact. Therefore, making them perfect.
Factor #3
You definitely have to leave your job when you turn 55 years old. Do not expect to get your benefits early if you leave your company at the age of 53. Unless you are in the business of emergency services. In that case, you can retrieve your benefits five years earlier. Therefore, you must be very cautious about the age cap. Otherwise, you will lose out a lot.
Factor #4
One of the best and most prominent factors that you need to understand is that you can retrieve money even if you get another job before the age cap. Most companies tend to hide this clause as they want to retain employees. Therefore, understand this clause effectively. If you are not leaving service, then you are allowed to retrieve the benefits when you retire for real. Thus, making it flexible, unlike other 401ks.
Should You Use It?
The rule of 55 is a significant and valuable detail that businesses need to understand. However, there always lies a general question of its viability. While there are some great benefits of the rule of 55, you need to understand there are good as well as dicey aspects regarding it.
First things first, it can affect your compounding interest or money that you might have received if you did not encash this. In other words, you need to be wary of the dwindling resources. Therefore, be very clear about whether you want to go along with the details or not. The best way to approach this problem is to have a retirement withdrawal plan.
Then again, having a parachute to bank on post-55 years of age is good. It means that it will help you get ahead in old age. Therefore, making it perfect for people of old age.
The Final Thought
In summation, that is all there you need to understand about the rule of 55. If you are someone who is looking to take benefits of the plan, then you must remember the points that we discussed. However, the regulations are changing rapidly. Therefore, you need to understand the subject inside out in order to use it effectively.
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