Quitting Out Loud – The Early Retirement Decision

Waiting until 65 to retire isn’t as easy as it used to be – especially since, for many people, their retirement age is now closer to 67. But retiring early and successfully requires planning to ensure you can have the life you envision.

Healthcare costs over your retirement are by far the most significant expense – and one with the potential to increase at the highest rate. Over the past twenty years, medical care costs have grown an average of 3.5% per year.¹

Will you be able to draw from your retirement accounts without penalties? What about taxes? There’s a lot to think about, so breaking it down into the big areas and tackling it systematically can ease the financial and life transition.

Planning for Healthcare

Medicare eligibility begins at age 65, so you’ll need to source healthcare coverage if you retire before that. Retiree medical benefits from your current employer may solve this problem, but it’s increasingly rare for companies to offer this type of coverage.

If you’re married and your spouse continues to work, joining their company plan may be the most cost-effective option. If that’s possible, you can also access marketplace insurance. The Affordable Care Act created marketplace insurance that you can explore through your state’s healthcare portal or healthcare.gov.

Depending on your situation, you may be able to qualify for tax credits that lower your monthly premium payments. However, these credits are income-dependent, so you must plan your income carefully and keep it below specified levels.

Can You Access Your Money Without Penalties?

Withdrawing funds from a 401(k) before reaching age 59 ½ usually means paying a 10% penalty. However, the IRS has a special tax guideline to let you access those funds. It’s called the “Rule of 55,” and it allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55. Like most IRS rules, it has particular provisions you’ll need to follow.

For example, you can only withdraw from your most recent retirement account – so if you’re planning to take advantage of this provision, you may want to roll over all your other accounts first so you have access to as much money as possible.

Another option you may be able to use is the Substantially Equal Periodic Payment (SEPP) plan. This allows you to withdraw funds prior to age 59 1/2 without penalty, but you must choose between three different distribution methods. It’s not very flexible after payments start, other than allowing you to change the distribution method one time. You are blocked from continuing to fund the retirement account once distributions start. The SEPP plan guidelines last until you reach age 59 1/2 or the plan has been active for five years, whichever is later.

The Financial Side is Only Part of the Equation

A successful retirement is about what you want to do with this phase of your life as much as about how you fund it. It’s important to make the early retirement decision because you want to add more to your life – not because you want to get away from your job.

Think through whether changing jobs, cutting down on hours, or adding something meaningful to your existing routine – such as mentoring younger employees, volunteering, or taking up a hobby – would make a difference to your feelings about retirement.

Retirement is a big step, and having a plan in place that keeps you moving forward is important to making a successful transition.

The Bottom Line

Retirement is a big decision, and making it early adds to the complexity. That doesn’t mean you shouldn’t do it – there are tactics and strategies that can help you ensure you can plan and fund a happy, meaningful, affordable retirement at any age. It just requires some careful planning.

1. Peterson Foundation. Why Are Americans Paying More for Healthcare? February 16, 2022. Peter G. Peterson Foundation.

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