Planning ahead for early retirement
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. Early retirement requires planning to ensure you can have the great life you envision for your post-retirement years.
One of the most significant considerations for retirement is the cost of healthcare. Over the past twenty years, medical care costs have grown an average of 3.5% per year.1
Questions you may ask include: will I be able to draw from my retirement accounts without penalties? What,if any, are the implications on my taxes? Tacking the issues strategically can help facilitate the financial and life transition associated with retiring.
Planning for Healthcare
Medicare eligibility begins at age 65, so you’ll need to source healthcare coverage if you retire before age 65. If you currently work for a company that still offer retiree medical benefits, you may not encounter this particular issue. However, it is increasingly rare for companies to offer this type of coverage and you should know if your company does or does not.
If you’re married and your spouse continues to work, joining their company plan may represent a 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?
A 10% penalty can be assessed when withdrawing funds from a 401(k) before reaching age 59 ½. The exception is IRS “Rule of 55,” which 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.
Financial Considerations are 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. Sadly, many people opt to leave their jobs and/or successful careers to get away from a job or a boss they can’t tolerate. There are other ways to manage this and protect your Career Asset.
Think about the tangible and intangible benefits of retiring early and consider if changing jobs, reducing hours, mentoring younger employees, volunteering, or taking up a hobby could change your attitude about retirement.
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, it just means you have more things to consider and weigh when making your decision.
- Peterson Foundation. Why Are Americans Paying More for Healthcare? February 16, 2022. Peter G. Peterson Foundation.
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