Retiring in your mid-50s sounds like a dream, doesn’t it? You’ve worked hard, started saving early, and maintained a disciplined approach to managing your finances. Through efficient tax planning, lifestyle management, and years of careful preparation, you’re finally ready to retire. But there’s one major obstacle you’ll face in early retirement: accessing your funds.
Social Security benefits don’t kick in until age 62, and most retirement accounts impose a penalty for withdrawals before age 59.5. If you’re on track for early retirement or actively working towards this goal, you’ll need a plan to bridge this financial gap. Here are three intentional strategies to incorporate into your retirement planning.
1. Build up non-tax-sheltered savings. One of the most critical components of an early retirement plan is having accessible savings outside traditional tax-sheltered accounts. You can achieve this by opening a non-tax-sheltered account such as an individual investment account, a joint account with your spouse, or a revocable living trust account. These accounts provide flexibility in how and when you withdraw funds. Unlike tax-sheltered accounts, there are no minimum distribution requirements or penalties tied to early access.
By relying on non-tax-sheltered savings early in retirement, you allow your tax-sheltered savings to continue growing, potentially maximizing the compounding benefits of deferred taxes. This strategy often happens naturally when pursuing aggressive saving goals, as you’ll likely exceed the contribution limits of tax-advantaged accounts. However, you should continue to fully fund your tax-sheltered accounts, like 401(k)s and IRAs, to maximize growth potential and help reduce your tax burden later in retirement.
2. Leverage the Rule of 55. Did you know that many 401(k) plans allow penalty-free withdrawals if you leave your job in or after the year you turn age 55? This “Rule of 55” is a lesser-known provision that can provide early access to your retirement funds without the standard 10% penalty. Whether you retire, are laid off, or simply quit, the Rule of 55 can be a lifeline to early retirees during the gap years before Social Security becomes available.
Since withdrawals under the Rule of 55 are subject to income tax but not penalties, you can control how much you withdraw annually and optimize your tax situation by timing withdrawals to align with lower-income years. To take advantage of this rule, check with your plan administrator to confirm whether your 401(k) plan offers this option. By leveraging the rule, you can create a smoother financial transition into retirement, avoid unnecessary tax burdens or penalties, and preserve your other assets for later years.
3. Consider Substantially Equal Periodic Payments. For individuals looking to access their retirement accounts before age 59.5, Substantially Equal Periodic Payments (SEPP) may be a viable option. Under IRS guidelines, SEPP allows you to withdraw funds from your retirement account penalty-free as long as you follow specific rules. Payments must continue for at least five years or until age 59.5, whichever is longer. Modifying or stopping the payments early triggers retroactive penalties and interest on previously withdrawn amounts, so this strategy should be approached cautiously and with guidance from a CERTIFIED FINANCIAL PLANNER™.
Unlike the Rule of 55, which applies only to certain employer-sponsored plans, SEPP can be applied to IRAs, offering more flexibility. The benefits of these fixed payments are that they provide a consistent and predictable stream of income, helping you cover living expenses during early retirement and making it easier to budget and manage your finances.
By incorporating these strategies into your financial plan, you can create a seamless transition into early retirement without worrying about penalties or limited access to your funds. Work with a CERTIFIED FINANCIAL PLANNER™ to determine which strategy works best for your unique financial situation. With careful planning and intentional strategies, early retirement is well within reach.