How to Retire Before 59½ Without Losing Your Shirt

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You work all your life for the day you can sit back and relax. But the closer you get to retirement age, the slower those weeks seem to crawl.

Your earliest retirement age depends on your age, your retirement savings and your cost of living. But if you’re heading into your 50s and frantically crunching the numbers, it might help to know there are a few available early retirement options.

Before we tell you how to retire at 59½ without losing your shirt, let’s first cover some retirement basics.

What Is Retirement Age?

Before you start considering early retirement, it can help to break down the various retirement age minimums. Some of these depend on your years in the workforce, as well as your retirement savings account and pension types, but it’s a good starting point.

Earliest Social Security Retirement Age

If you pay taxes and qualify, Social Security will be there when you reach the minimum retirement age. Unfortunately, 59½ is a little too young to qualify for Social Security. You can start claiming benefits at 62, but this will reduce your monthly Social Security income for the entirety of your retirement. If you were born after 1959 and retire at 62, your benefits will be reduced by 30%.

Full retirement age for those born after 1959 is 67. If you can hold out until 70, your monthly benefits will increase even more. There are exceptions to this, though. For instance, you can request Social Security benefits before the age of 62 if you’re approved for a qualifying disability.

Earliest 401(k) Penalty-Free Withdrawals

Defined contribution plans like 401(k)s and 403(b)s have become the most popular retirement savings vehicles in recent years. Many of these are employer-sponsored, and often companies match worker contributions as a job perk. But those funds also have to remain in the account until you reach the age of 59½, assuming you don’t want to pay the IRS’s 10 percent penalty.

There is a notable exception to this rule, though. If you separate from your employer during the year after turning 55 or older, you can qualify for penalty-free access to your 401(k). If you work in federal law enforcement or border or customs patrol, or you’re a federal firefighter or air traffic controller, you can qualify after separation from service starting at age 50.

Earliest Pension Plan Withdrawals

Pensions may not be as common as they once were, but government workers and select private-sector employees still have access to this benefit. The best thing about a pension is that it sometimes allows you to retire earlier than your 60s.

If you have a pension, meet with your benefits coordinator to get eligibility details. Don’t forget about any previous employers where you might have benefits. You may have a pension with a job you had in your youngest working years that can provide a little extra income in retirement.

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The Cost of Early Retirement

Before you consider how early you can retire, it’s important to first understand the price you’ll pay. Here are the top reasons many people wait until at least 59½ to file those retirement papers.

IRS Penalties

Most retirement savings plans allow the funds to grow, tax-free until you withdraw them. The goal is to ensure participants are taken care of in their golden years. For that reason, the IRS has strict rules regarding withdrawing the funds early, and breaking those rules comes with a penalty.

Unless you meet one of the IRS’s exceptions, you’ll pay a 10 percent penalty on any funds you withdraw early. This is in addition to the taxes you’ll pay. If you withdraw from a new SIMPLE IRA within the first two years, you’ll pay a 25% additional tax instead of the 10% penalty.

Long-Term Payment Reduction

When you take an early retirement, you run the risk of depleting your funds. If you retire at 55 and live to the average life expectancy of 76, your retirement savings will have to last more than a decade. Since many people live beyond the average, though, you simply may run out of money.

There’s also the benefit reduction you get from the Social Security Administration by retiring early. If you can hold out until 70, you get the maximum benefit, but if you start taking payments at the earliest age, 62, your monthly benefits drop by 30 percent. It’s important to factor that in when you’re creating your post-retirement budget.

Tax Repercussions

It’s important to include income taxes in your retirement budget. All that money you put into your 401(k), tax-free, will be taxed when you take it out. The good news is, after retirement your monthly income will likely be lower overall, which will put you in a lower tax bracket. Take a look at the current IRS tax brackets and budget for what you’ll owe the IRS.

Also consider that some of your Social Security income may be taxed. You’ll only owe federal taxes on your Social Security if your total combined income exceeds IRS minimums, but in some states, you’ll be expected to file a state income tax on your Social Security earnings.

Ho to Retire at 59½ Without Losing Your Shirt

What if you’ve calculated all the funds you can access and still don’t have enough to retire early? The next best step is to start setting as much money aside as possible.

“If you’re not sure when (or if) you can retire in your 50s, don’t despair, instead prepare,” Jeremy Bohne, financial advisor and founder of Paceline Wealth Management, said. “Wherever you are on your path to retirement, starting to plan is a solid choice.”

Here are some things you can do to accelerate your retirement.

Assess Your Finances

Before you can retire at all, you’ll need to make sure you’ll have monthly income. Yes, you may have taken a look at the money that will go into your bank account, but don’t forget about the funds going out. You’ll still need to pay for your basic living expenses, and you’ll also be losing any benefits you get from your employer.

“A significant aspect often overlooked is planning for healthcare costs, a considerable expense before Medicare kicks in at 65,” Forrest McCall, finance expert and founder of Passive Income Freak, said. “Navigating options like COBRA, private insurance, or leveraging a health savings account (HSA) can be critical in managing these expenses.”

Use Catch-Up Contributions

Turning 50 has its perks. As soon as you blow out the candles on your birthday cake, the IRS lets you contribute a little more to your 401(k) each year. If you’re over age 49, you can put an extra $7,500 toward your 401(k), 403(b), eligible 457 plan, or Thrift Savings Plan as a catch-up contribution. This is in addition to the $23,000 yearly limit for 2024. You can also add an extra $1,000 to your IRA in 2024 as a catch-up contribution.

“In your 50s, most people are at or near the peak of their earnings potential, so it’s important to take advantage of catch-up contributions in your 401k and save as much as you can,” Bohne said.

Maximize Your Earnings

Whether you’re at your earnings peak or not, this is a great time to try to generate a little extra income. Either find a way to increase your pay or take a part-time job and put the extra money toward retirement. By working hard now, you can enjoy the fruits of that labor after you leave the workforce.

“One of the things one can do is to increase one’s skills in order to increase one’s working rate per hour,” Raymond Quisumbing, registered financial planner at BizReport, said. “Once you have a high enough income, one needs to balance that by having an even higher savings rate.”

Consider Going Part-Time

Early retirement doesn’t have to be an all-or-nothing proposition. If you’re burnt out or simply tired of working long hours, a job switch may be in order. If you have extra savings, you could even consider taking a pay cut. It may be less than you’re making now, but if it eases your stress and helps you avoid spending your savings, it’s better than taking early retirement.

Another option is to retire early but supplement your earnings with a part-time job. Once you’re on Social Security, you can earn up to a certain amount before the IRS begins deducting benefits. For 2024, those below full retirement age can earn up to $22,320 without seeing a reduction in benefits. Once you earn more than that, you’ll lose $1 for every $2 earned above the limit.

Prepare Some Passive Income

Investment-minded retirees might want to consider ways to generate passive income for the foreseeable future. This might mean investing in rental property or putting some money into high-interest, low-risk investments like dividends.

“The income derived from those assets will then serve as your income stream post-retirement and will help preserve your retirement fund from being depleted,” Quisumbing said.

Whether you retire today or once you reach full retirement age, some careful planning can go a long way. Set a budget, considering all your expenses and income, but feel free to tweak it as you learn more about your post-retirement finances.

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.