• Matt Davis

Early Retirement Strategies

A Gallup poll from 2014 revealed that most Americans expect to retire by age 66. However, some of us hope to retire earlier than that. If we are fortunate enough to have saved enough for that reality, there are some complexities for retiring early.

Make a Plan

Like every important financial decision, building a plan should always be the first step. Retiring early can be a risky decision and one not made lightly. The last few years of working are the most important and each year you get closer to Social Security can greatly reduce the stress on your portfolio. That being said, if you have saved enough, the next step is to come up with a strategy to avoid paying penalties for taking out retirement funds early.

Penalty-Free Distributions

Once the plan works, the next step is to be as efficient as possible. If the majority of your savings are in after-tax money, there are no restrictions on how you use the cash and planning is simple. However, if you are like most Americans, the majority of your savings are in retirement accounts and if you plan on retiring before 59 and a half, you will be subject to a 10% penalty if you don’t plan appropriately.

Over 55 Rule

If you are close to 59 and a half, the most straightforward way to using retirement funds is using a provision we call the over 55 rule. The IRS allows you to take penalty-free distribution (you still have to pay income taxes like normal) if your last day of work is in the year you turn 55 and if you take the withdrawal from your current employer’s 401(k). An important note is that this rule does not apply to IRAs. Also, it is worth noting that just because the IRS allows it, does not mean your company does. If your company doesn’t allow retirement distributions, there is usually the opportunity to utilize the rule one time on the final distribution of the 401(k).

72(t) or SEPP

If you are farther away from 59 and a half, it might be best to use a 72(t) or what is also known as a Substantially Equal Periodic Payments (SEPP) plan. The IRS will allow you to take a certain amount out each year based on age and interest rates for a minimum of 5 years or until 59 and a half, whichever is longer. It is important to understand that there are no exceptions to this rule. Once set into motion, it must be followed exactly or you will have to pay penalties on every year you took a distribution. Generally, even for the most detailed oriented, we recommend using an advisor to help pull together this strategy. There are limitations due to the interest rate calculation and this strategy is often used in combination with other strategies.

While it is more cumbersome to retire early, that does not mean it is impossible by any means. With the right planning and sufficient savings, it should be easy enough to retire early with just a little extra work. If you need help pulling together a plan, never hesitate to reach out and we can help you walk through the steps to ensure a successful retirement.

Riffkin, Rebecca. (2014). Average U.S. Retirement Age Rises to 62. Gallup. Retrieved from: http://www.gallup.com/poll/168707/average-retirement-age-rises.aspx.

IRS. (2015). Retirement Plans FAQS regarding Substantially Equal Periodic Payments. Retrieved from: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

IRs. (2014). Publication 575. Retrieved from: http://www.irs.gov/pub/irs-pdf/p575.pdf

#retiringearly #penaltyfreedistributions #SubstantiallyEqualPeriodicPayments

DISCLOSURE Information on this website and others should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss. The materials and content herein are not a substitute for obtaining professional tax, personal financial planning, or other relevant financial advice from a qualified person or firm. For full disclosure click on the disclosure link at the bottom.

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