It’s not as easy as it used to be to wait until you’re 65 to retire, especially since many people now leave closer to 67. But if you want to retire early and live the life you want to live, you need to plan.
By far, the biggest bill you’ll have in retirement is health care, and it’s also the one that could grow the fastest. Over the past 20 years, the cost of health care has gone up by an average of 3.5% per year.
Will there be any penalties if you take money out of your retirement accounts? How about taxes? There is a lot to think about, so breaking it down into the big parts and tackling them one at a time can make the financial and life changes easier.
Planning for Healthcare
Medicare coverage starts at age 65, so if you leave before then, you’ll need to find other health care coverage. You might be able to solve this problem with medical benefits from your current employer after you retire, but companies are becoming less likely to provide this kind of coverage.
If you are married and your partner still works, you may save the most money by joining their company plan. If that’s possible, you can also get insurance through the marketplace. The Affordable Care Act created insurance marketplaces, which you can look into on healthcare.gov or the healthcare site for your state.
Depending on your position, you may be able to get tax credits that lower your monthly premium payments. But these credits depend on how much money you make, so you must carefully plan your income and keep it below certain amounts.
Can you access your money without penalties?
If you take money out of your 401(k) before you’re 59 1/2 years old, you usually have to pay a 10% penalty. But there is a special tax rule from the IRS that lets you get to those funds. It’s called the “Rule of 55,” and if you quit your job during or after the year you turn 55, you don’t have to pay the 10% early exit penalty on your 401(k) or 403(b) account. Like most IRS rules, it has specific rules you must follow.
For example, you can only take money out of the last retirement account you opened. If you want to use this rule, you may want to roll over all your other accounts first so you can get as much money as possible.
The Substantially Equal Periodic Payment (SEPP) plan is another option you might be able to use. This lets you take money out before age 59 1/2 without paying a fee, but you have to choose between three different ways to do it. After payments start, it’s not very flexible. You can only change the way payments are made once. Once you start taking money out of the account, you can’t put more money in. The SEPP plan rules stay in place until you are 59 1/2 years old or the plan has been in effect for five years, whichever comes first.
Why do you want to retire early? Non-financial considerations
What you want to do with this time of your life is just as important as how you plan to pay for it. It’s important to decide to quit early because you want to add to your life, not because you want to stop working.
Think about how you would feel about retirement if you changed jobs, worked fewer hours, or added something important to your daily routine, like helping younger employees, volunteering, or taking up a hobby.
Retirement is a big step, and it’s important to have a plan that keeps you moving forward if you want the change to go well.
“The Bottom Line”
Making the choice to retire is a big one, and making it early makes it even harder. That doesn’t mean you shouldn’t do it, though. There are ways to prepare so you can truly thrive in retirement at any age. It just takes some careful planning.
Mark Whitaker, CFP® is a Certified Financial Planner™ professional, but he is not providing specific investment advice through this blog. This blog is for educational purposes only. Before making any financial decisions, you should consult with a qualified financial planner who can provide tailored advice based on your individual circumstances. Please visit https://earlyretirementadvice.com/online-booking/ to schedule a free one on one retirement consultation.
