Normal Retirement: Ages 66 To 70
For many, the upper 60s is the golden mean of retirement timingyou’re old enough to have built up a nice financial reserve and young enough to enjoy your job-free years. The fact that you’ll get your full Social Security payment at age 66-67 can make a huge difference, especially if you’re relatively healthy and likely to have an average, or longer-than-average, retirement.
Waiting also gives you a few extra years to shore up your tax-advantaged investment accounts. Investors who are at least 50 years of age can make a catch-up contribution to their 401 or IRA. For 2021 and 2022, those 50 or older can contribute $7,000 to a traditional IRA or Roth IRA. If you use a 401 to save for retirement, you can defer up to $26,000 of your salary in 2021 once you reach the age of 50.
Also, waiting until you hit 65 means that you are eligible for Medicare, which is typically a fraction of the cost of individual insurance plans for older adults.
Normal retirement age, or the age at which you receive full Social Security benefits, gradually increases to 67 for anyone born in 1960 or after.
What To Do If Thats Still Not Enough
Contributing to the two retirement plans should get you close to your savings goal.
But if it isnt, you can always save additional funds in taxable accounts.
Even though the return wont be as good, taxable accounts can still serve an important purpose once you reach your desired retirement age. You wont be able to access funds from your retirement plans until you reach age 59 ½.
Yes, you can access them early, but not only will you have to pay ordinary income tax on the withdrawals, but youll also have to pay a 10% early withdrawal penalty.
If you have a substantial amount of your portfolio in taxable accounts, you can access those funds between 55 and 59 ½.
The withdrawals wont be taxable at all.
That could provide a valuable bridge between early retirement and penalty-free withdrawals from your retirement plan.
The Reality Of Quitting Work Can Be Far Different From The Fantasy Here’s What You Need To Know
by John Waggoner, AARP, June 1, 2021
En español | Even if you love your job, there are times when you’d rather be alphabetizing the spice shelf than riding a packed train alongside hundreds of sniffling fellow commuters. And as you sway in the car next to a man who has biked four hours to the station, you might be thinking about early retirement.
Unfortunately, early retirement isn’t for everyone. In fact, it isn’t for most people. Just 11 percent of today’s workers plan to retire before age 60, according to an Employee Benefit Research Institute survey. For many of those who do take the plunge, the reality of early retirement can turn out to be far different than the fantasy. Here are a few things to consider before you decide to retire early.
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Number 4 Access Your 457 In Early Retirement
One of the most common questions I get from my new colleagues is about 457 plans. Ive written a post about everything you need to know about investing in a 457 plan previously.
The one thing I will say that 457s are definitely useful for is early retirement. Unlike your other retirement accounts, you can access the deferred compensation 457 as soon as you leave your employer. Youll, of course, pay taxes on what you deferred but thats fine. At least you arent getting slapped with the 10% penalty.
I am not currently contributing to my employers 457. However, they have good distribution options, including the option to receive the money over a fixed period of years .
This is perfect for early retirement.
I could subtract my current age from 59.5 and stretch my 457 until I can access my 401K/403B. Ideally, I would be in a lower tax bracket in early retirement than I was in my peak earning years. So, this could provide a great benefit without getting hit by the 10% penalty.
Or I could take it out over a shorter period of 5-10 years to avoid getting hit with high taxes while I perform a Roth Ladder Conversion on my 401K . Also, a shorter time period means I dont have to worry about the financial stability of my institution longer than necessary once I am gone and have no idea how its doing. Remember, the 457 is considered owned by the employer and is available to creditors if your employer falls on bad financial times.
Unlock Your Retirement Savings Before Age 59
Would you like to retire early, but are finding that the age 59-1/2 requirement is getting in the way?
Age 59-1/2 is when the IRS says you can finally begin to access the hard-earned retirement savings youve got in your tax-sheltered accounts like your 401 and IRA.
For most people who retire at age 62, the age 59-1/2 requirement is no problem. But if youre a diligent saver and on track to reach financial freedom long before then, this can be a huge log in the road!
I had this problem for years. In my twenties when I first started learning more about personal finance, I began to realize how powerful compounding returns were and started making strives to save more and more into my 401 and IRA every year.
I kept re-running the numbers, and found I could retire as soon as age 55 then age 50 and now as soon as age 46!
But then I hit a wall! I noticed that almost every type of retirement account did not allow withdrawals until age 59-1/2. If you did try to take out your money early, then youd have to pay an annoying 10% penalty .
I was frustrated and there had to be a way around this!
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You May Have A Long Long Life Ahead Of You
A woman who retires at 55 will have to make her savings last for 28.6 years, on average, compared to 20.4 years if she retires at 65. A man who retires at 55 will have to stretch his savings for 25.1 years, rather than 17.8. And for couples who make it to 65, there’s a 25 percent change that the surviving spouse lives to 98, according to the Society of Actuaries.
“With improved health care, many people are living longer than the national averages, says Angela Dorsey, a certified financial planner in Torrance, California.
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Number 3 Partial Fire
One of the least complicated ways to have enough money in early retirement is to have income from work. I hear you saying, Wait a minute! I thought we were talking about retirement.
This is true, but let me give you an example. My main gig is working as an anesthesiologist. However, that is not the only way that I make money. For example, The Physician Philosopher blog makes money, too.
Here are two ways I can partial FIRE.
First, I can take a step back to 0.5 FTE or 0.7 FTE. Part time work can help me find the ideal work-life balance. It would provide time for me to do things I want to while still earning access to retirement accounts, health care benefits, etc.
Second, I could also consider working on other things that bring me joy, but arent my main gig. Say I retire early and devote more time The Physician Philosopher or to real estate or creating inventions. There are many examples of physician side hustles. All of these may take up less time than a full-time job, provide income, and allow you to still have an active retirement.
Humans are meant to be productive one way or another. This is why the people that retire well still have passions that they pursue. Playing golf every day is going to get old after a while .
You need something to do when you are bridging that early retirement gap. Hopefully, it can also make a little money for you.
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The Start Of The Early Retirement Solutions Series
The title Early Retirement Solutions is the name Ill be giving to a series of other ebooks I plan to write over the next few years targeting other specific questions you might have about early retirement and how to get there.
When it comes to financial freedom, there are so many things that can trip you along the way. Everything from the best ways to save your money to tax avoidance and knowing just how much is the right amount to withdraw safely. I plan to spend a little bit of time with many of these sorts of topics and do a deep-dive into each one individually.
If there are any special questions or topics youd like to see me cover, please feel free to let me know by commenting below or sending me an email. Id be glad to hear what youre interested in knowing more about.
Think Strategically About Pension And Social Security Benefits
For most retirees, Social Security and pensions are the two primary sources of regular income in retirement. You usually can collect these payments earlyat age 62 for Social Security and sometimes as early as age 55 with a pension. However, taking benefits early will mean that you get smaller monthly benefits for the rest of your life. That can matter to your bottom line, even if you expect Social Security to be merely the icing on your retirement cake.
On the Social Security website, you can find a projection of what your benefits would be if you were pushed to claim them several years early. But if you’re part of a two-income couple, you may want to make an appointment at a Social Security office or with a financial professional to weigh the potential options.
For example, when you die, your spouse is eligible to receive your monthly benefit if it’s higher than his or her own. But if you claim your benefits early, thus receiving a reduced amount, you’re likewise limiting your spouse’s potential survivor benefit.
If you have a pension, your employer’s pension administrator can help estimate your monthly pension payments at various ages. Once you have these estimates, you’ll have a good idea of how much monthly income you can count on at any given point in time.
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Keep Your Money Where It Is
If you retire or lose your job when youre age 55 or older and maintain your 401 with your former company, you can take penalty-free withdrawals between ages 55 and 59 1/2. from the employer you just left.) This is known as the IRS Rule of 55. Your company will have rules for payouts, such as limiting withdrawals to quarterly or annually.
Withdrawing all the money is also an option, but likely not your best one. Depending on your age and the type of the retirement plan you have, if you take out all funds, you could have immediate tax consequences and penalties. And, the savings lose the opportunity for growth, too.
Age You Can Begin Withdrawals From A 401 Plan
You may be eligible to withdraw money from your 401 plan as early as age 55. Different rules apply to distributions you take at different ages. Key 401 retirement ages to be aware of are 55, 59 1/2, and age 70 1/2. If you are not yet age 55 and you need to access your 401 money, you might be able to use a 401 loan, or take a hardship withdrawal, however, be cautious of early withdrawals. There is creditor protection provided to money in a 401 plan, so you need to think twice before you cash out of your plan.
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Examine Benefit End Dates
Some benefits may stop the day youre done with work, but others may extend by a set number of days. However, those benefits arent as common as they used to be, says Winston.
This list can help in the retiring transition:
- Upcoming checkups: If you have dental or vision insurance now but wont when you retire, schedule appointments before your last day while those expenses may still be covered.
- Life insurance extension: To convert a voluntary life insurance policy , contact your benefits administrator to get the paperwork started. The difference: Youll pay the premium directly to the insurance company, rather than having it payroll deducted.
- Health insurance and retirement: More on those topics below.
Tip: Enter your employee benefits or human resources department into the contacts on your phone in case you have questions once youre retired.
Can You Afford To Retire Early
You’ve got a sense of your ideal retirement age. And you’ve probably made certain plans based on that timeline. But what if you’re forced to retire sooner than you expect?
Early retirement is nothing new, but it’s clear how much the COVID-19 pandemic has affected an aging workforce. Whether due to downsizing, objections to vaccine mandates, concerns about exposure risks, other health issues, or the desire for more leisure time, the retired population grew by 3.5 million over the past two yearscompared to an annual average of 1 million between 2008 and 2019according to the Pew Research Center.1 At the same time, a survey conducted by the National Institute on Retirement Security revealed that more than half of Americans are concerned that the COVID-19 pandemic has impacted their ability to achieve a secure retirement.2
There’s no need to panic, but those numbers make one thing clear, says Rob Williams, managing director of financial planning, retirement income, and wealth management for the Schwab Center for Financial Research. Flexible and personalized financial planning that addresses how you’d cope if you had to retire early can help you make the best use of all your resources.
Here are six steps to follow. We’ll use as an example a person who’s seeing if they could retire five years early, but the steps remain the same regardless of your individual time frame.
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Ways To Overcome The Early Retirement Gap To Age 595
We love talking about FIRE . I cannot wait to be able to do what I want, when I want. Every. Single. Day! What we dont spend as much time talking about is the inherent early retirement gap that is created when we FIRE.
What is the early retirement gap?
It is the time between when you FIRE and when you turn age 59.5 and can access your traditional retirement funds. At age 59.5, youre likely on dry land as you can now access your 401K, 403B, and IRA from all those years of work without getting slapped with a 10% penalty for early withdrawal .
How To Retire At 50
If you plan to retire by 50, you need to have enough assets to sustain your lifestyle for decades. This means you must either have saved a lot, or get by on very little, or both. People who retire early have typically worked very hard early in their career, inherited money, and/or invested wisely. Perhaps they started a successful business, worked to grow it, and sold it for a significant profit they may have developed and sold intellectual property as well. In order to make their savings last, they also know how to live within their means.
If you are willing to live on less and don’t have a lot of savings, consider a low-cost retirement lifestyle. Would you be comfortable living in an RV in a campground? Would a modest apartment or rental unit in a cheaper city suit you? Does retiring in a low-cost overseas community appeal to you? If any of these lifestyles sounds attractive, early retirement may work for you, even if you don’t have a large amount of retirement savings.
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Taking Money From Your Ira Or Old 401 At Age 55
Substantially Equal Periodic Payments is the option for early retirees to access funds in an IRA or old 401 before age 59 1/2 without incurring a penalty. But there are rules.
At a high level, you have the choice of one of three IRS-approved distribution methods. Your required withdrawal is calculated according to the method you selected. You don’t get to decide how much you want to take out and when.
The payments must continue for at least five years or until you turn 59 1/2, whichever is later. If you start a SEPP program at age 55, you’ll be able to stop at 60. Failure to follow the SEPP rules will trigger penalties and interest.
And keep in mind, distributions from traditional 401 or IRA are fully taxable as ordinary income. If the distribution is less than ideal, you’ll wind up with even less to maintain your lifestyle. If you’ve been at your job for a very long time and have a large account, the Substantially Equal Periodic Payments could leave you with little control over your tax situation and force you to take more from your tax-advantaged accounts than you need long before Required Minimum Distributions begin at age 72.
Another option that might be available in some 401 plans is the ability for individuals who retire between age 55 and 59 1/2 to take money from their account after theyve retired and separated from service.
Hone In On Your Expenses
Estimating your expenses in retirement is difficult and some investors actually overestimate retirement spending needs. Whether or not you’re financially able to retire is more about your expenses than your savings. Put another way, what you’re going to spend drives how much you’ll need saved so you don’t run out of money.
Here’s a simple example:
If your portfolio is $2,000,000 and you need to take out $100,000 per year , you’ll run out of money when you’re 84 assuming a 6% annual return. But if you only needed $80,000/year instead, your income could last until age 96.
If your lifestyle is relatively inexpensive, retiring at 55 may not be terribly challenging. But being able to retire early gets harder as lifestyle inflation takes over.
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