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Things to Consider if You Might Retire Before 60

Things to Consider if You Might Retire Before 60

February 01, 2018
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Sometimes people consider retiring before turning 60.

If this may apply to you, there are some things to think about that could potentially make your transition easier. For example, retirement funds may need to be withdrawn strategically.


Many people that retire early have traditional IRAs.

In general, the federal government wants you to leave those assets alone until your sixties. So, it assesses a 10% early withdrawal penalty for most savers who take money out prior to age 59½.


You may be able to avoid that 10% penalty by planning 72(t) distributions.

Under a provision in the Internal Revenue Code, you can withdraw funds from a traditional IRA prior to age 59½ in the form of substantially equal periodic payments (SEPP’s). The payments must last for at least five years or until you reach age 59½, whichever period is longer. Once the periodic payments are established, they cannot be revised. You are not allowed to take more or less than the calculated distribution. If the payments are not taken according to schedule, you will be hit with the 10% early withdrawal penalty retroactively on all distributions made.


Consider the IRS Rule of 55.

Some 401(k) plans allow an employee who “separates from service” between the ages of 55 and 59½ to pull money out before 59½ without the 10% penalty. But you should do some research before making any decisions, as many plans only allow a one-time lump-sum withdrawal.


Things get easier if you have Roth IRA money.

You can withdraw contributions from these accounts at any time without incurring taxes or tax penalties. At age 59½ or older, both account contributions and account earnings can be distributed tax free and penalty free if you have held the account for at least five years.


Health insurance coverage is critical.

This is especially true if your former employer was subsidizing your premiums. What are your options after 18 months of COBRA if it is available? If you have a spouse working at an employer that offers health insurance you may be able to get into that plan. The health insurance exchanges are another option. Retirement (and the loss of employer health coverage) counts as a “qualifying life event,” giving you a special 60-day window outside the usual enrollment period.


Think about a conservative retirement income withdrawal rate.

The standard 4% baseline may be too optimistic; 3% or 3.5% may be more realistic if you feel you will be retired for 30 years or longer.


Should you claim Social Security at age 62?

You may be able to, but should carefully weigh the pros and cons. There is a tradeoff of receiving smaller monthly benefits over the rest of your life compared with larger monthly benefits you could receive by claiming later.


Any early retirement decision should prompt a consultation with a qualified financial or tax professional. This is a critical financial juncture in your life; and whether you find yourself at it by choice or by chance, your decisions could have lifelong impact.