“Millennials planning for early retirement.”
“This couple’s on fire. How they retired at 40.”
The headlines about the financial independence, retire early (FIRE) movement are enticing, but what about those who are closer to retirement age by a decade or less? Regions has compiled some key retirement tips for those exploring an earlier career departure.
“According to a Harvard Health Publishing article, life expectancy in the U.S. dropped from 79 to 77 years in 2020,” shared Ariel Sanchez Alfonso, a Regions private wealth advisor in Miami. “The reality is many people live much longer than this, making retirement planning incredibly important.”
Sanchez Alfonso, along with private wealth managers and advisors across the country, engages in early retirement conversations with clients every day. Many clients eye their own early retirement, but closer to ages 50-plus. He notes that there are a few often little-known rules that allow exceptions to the standard rules around withdrawals from retirement accounts making that possibility more realistic.
Our financial planning process allows us to project a client’s cash flow during their life expectancy and suggests strategies and/or alternatives to make sure that assets last during retirement.
Maya Brill, senior wealth strategist for Regions
The Rule of 55 Retirement Tip
An exception to the 10 percent penalty for withdrawals from 401(k) plans prior to age 59 ½, the “Rule of 55” allows an individual who leaves their job in or after the year they turn age 55 to take penalty-free withdrawals from the 401(k)-account associated with their most recent employment.
“While the Rule of 55 allows an individual to avoid the 10 percent early withdrawal penalty, income tax will still apply to each traditional 401(k) distribution,” noted Maya Brill, senior wealth strategist. “A key planning consideration is that if the 401(k)-account balance is rolled over to an IRA, the individual will need to wait until age 59 ½ to take IRA withdrawals without penalty.”
With this in mind, there are a few questions Sanchez Alfonso asks his clients considering retirement before 59 ½:
- How do you plan to spend your money during retirement?
- What is your current cost of living?
- How will you spend your time?
- Do you have sources of income available besides retirement accounts and Social Security?
“We really have to be forward-looking when considering early retirement,” said Sanchez Alfonso. “It is important to assess expenses today while taking into account what those may look like in the future. Additionally, if you plan to travel or take up a hobby, there are expenses around all that relaxation and fun. Our financial planning process allows us to project a client’s cash flow during their life expectancy and suggests strategies and/or alternatives to make sure that assets last during retirement.”
Brill shared that in addition to the “Rule of 55”, there are also distributions under IRC Section 72(t). This provision allows withdrawal of a series of substantially equal periodic payments from an IRA before age 59 ½, calculated based on life expectancy.
“The amount of the distribution is dependent on the distribution method chosen: required minimum distribution, amortization, or annuitization,” said Brill. “It is important to note that once started, 72(t) distributions must be taken for five years or until you reach age 59 ½, whichever is longer.”
Key Considerations: Inflation, Social Security, Health Insurance
If the past year or two have taught us anything, it is that inflation can take a real bite out of our financial picture. From market volatility to the seemingly ever-increasing cost of just about everything, what money can buy today may be far more than 20 years from now.
“This is one reason you see early retirees rejoin the work force or launch a second act,” noted Sanchez Alfonso. “We’ve seen clients go from retirement to launching a business because they realize that they aren’t ready to sail off into the sunset.”
Another thing to keep in mind if considering early retirement, is that you have to wait until the age of 62 before accessing social security.
A third key consideration going into retirement is healthcare. There are always options, but the costs can vary.
“Medicare starts at age 65, so you need to weigh the options if you retire prior to that milestone age,” said Sanchez Alfonso.
A few questions about healthcare insurance:
- Can you keep your current employer plan – and if so, how much will it cost?
- If you’re married and your spouse keeps working, can you get coverage under your spouse’s insurance?
- Will you need to access private medical insurance?
“With our financial planning process, we can plug in the cost of private medical insurance for our clients and evaluate its impact in their cash flow during retirement,” he continued.
Playing Catch-Up Starting at Age 50
Perhaps early in your career you weren’t in a position to contribute the full amount to your retirement accounts, or you waited until you were more established in your career to open and/or fund retirement accounts. Brill reminds us that beginning at age 50, individuals are eligible to make additional catch-up contributions to their qualified retirement accounts.
“For 2023, the catch-up contribution amount for 401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs is $7,500 for a total contribution of $30,000,” said Brill. “IRA catch-up contributions are $1,000 for a total contribution of $7,500 for 2023.”
In December 2022, the Consolidated Appropriations Act of 2023 was signed into law and included tax-related provisions like the Securing a Strong Retirement Act or Secure 2.0. Among those are additional provisions pertaining to catch-up contributions.
“Beginning Jan. 1, 2025, the Act boosts the amount taxpayers aged 60-63 may make as catch-up contributions to their employer-sponsored retirement accounts,” noted Brill in her recent article on elements of the Consolidated Appropriations Act. “The increased catch-up amount will be the greater of $10,000 or 150% of the regular catch-up contribution amount for the year.”