Many people I talk to would love to take early retirement.
What they typically mean is that they would love to retire early from their current occupation, live off retirement savings and find a hobby or passion to pursue and maybe make some income from in their later years!
Early retirement is definitely possible, and I am a big proponent of going after your passions – after all, true happiness is not about the size of your bank accounts, it’s about the quality of relationships and pursuing your purpose.
There are some important ages and rules to keep in mind if you are looking at an early retirement – let’s take a look at a few of them.
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Early Retirement Defined
Normal retirement age defined by the Social Security Administration is age 67 for those born 1960 or later.
For those born between 1943 and 1960 it’s somewhere between 66 and 67 (they add a few months for each year born after 1954).
So, for the sake of argument we’ll say early retirement is anything prior to Normal Retirement Age of 66.
Early Retirement – Important Rules at Age 50
In 2002, the IRS allowed for a “catch-up” provision for older individuals.
If you are age 50 or older, you may now contribute an extra $1,000 to your Traditional IRAs and Roth IRAs and an additional $5,500 to your 401ks in 2010.
This is a great deal for those looking to open a Roth IRA and squirrel away extra money for early retirement!
Early Retirement – Important Rules at Age 55
Age 55 is a big deal for those looking at early retirement.
Why? Because generally speaking, if you are under age 59 1/2 and take an early distribution from your IRA or retirement plans you get whacked with a 10% premature distribution penalty!
But get this – if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without a 10% penalty!
Did you catch that? …NO PENALTY for early retirement distributions. This is known as the “Age 55 Exception”.
Watch out though, if you roll your money to an IRA, the deal is done.
You must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.
This is a HUGE opportunity for those looking at early retirement.
Early Retirement – Important Rules at Age 59 1/2
Ever celebrate your “half-birthdays”?
You’ll definitely want to celebrate this one!!
Age 59 1/2 is the traditional age in which you can withdraw your retirement money without fear!
Uncle Sam won’t be slamming you with a 10% penalty for pre-mature distributions.
But remember, you MUST be 59 1/2 exactly, to the day, to begin taking them. Don’t ask me why, that’s what the IRS has deemed.
So don’t take a withdrawal at age 59 and 5 months or you’ll be sorry.
Early Retirement – Important Rules at Age 62
What’s so important about age 62?
Well, only the fact that you can take your for Social Security benefits starting at this age.
It doesn’t mean you have to or even that you should, but you at least have the option available to you.
Of course it will be a reduced benefit, and you’ll have to be wary of some rules regarding income earned in retirement, which might force you to pay back some of your early Social Security benefits.
So just because it’s available doesn’t mean you should snatch it up – you’ll need to run some numbers to determine if early benefits are right for you.
Early Retirement – Important Rules at Age 65
Age 65 seems like the common retirement date these days even if it isn’t your Normal Retirement Age.
At this age you now qualify to take Medicare, which is social insurance including two main parts.
Part A covers hospitalization and Part B acts as your medical insurance.
You need to apply for Medicare and will want to do that three months before you turn 65.
Are You Planning on Early Retirement?
Readers, do you plan to retire early?
Are there any other important rules or milestones that you’d include?
I definitely plan to retire before the age of 67. But my hope is to not take social security until the age of 70 so that my monthly benefits will be greater.
In the meantime, I hope to use funds in my 401k and IRA’s to meet my expenses. I wasn’t aware of the “age 55 exception” though. Thanks for including this. I’ll look into it more and consider the possibility. Does this exclude the possiblity of finding other part-time work or income?
Overall though, I’ve been thinking a lot more about the possibility of semi-retirement after reading a book called Work Less, Live More. It talks about leaving full-time work well before retirement age, and working part-time while having large amounts of leisure time to pursue other interests.
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Darren – thanks for checking in. The Age 55 Exception does not preclude you from working part time or getting extra income. It just simply allows a way to collect income when you want without penalty!
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Great info.
More importantly, get yourself into position to be able to reire this early.
If you haven’t starting doing so, start planning now!
No matter how old you are…
Yes. I would definitely like to “retire” early and pursue my passions full-time. My best advice for retiring early… Focus on cash flow more than asset appreciation.
When most people I know talk about retirement, they focus on a total value of their 401k, the idea being that they’ll sell off a percentage of the account each year to fund retirement. But what if you outlive your savings? It’s better to focus on an annual income goal, and try to achieve that through passive income (dividends, royalties, rental income, interest, etc.) Then you get to spend your money and have your assets too!
For early retirement, first thanks for the “age 55 exception” for 401(k)s. There’s also the fact you can withdraw the principal from a Roth IRA any time you want.
In addition, IRS Rule 72(t) allows distributions even before age 55 for IRA withdrawals w/o the 10% penalty. There are one of three methods necessary to follow in determining the amount for withdrawal. Unfortunately, I don’t know all the details, but it’s definitely worth looking into.
PS: Sorry this is two years late.