The thought of retiring early is incredibly appealing. The Internal Revenue Service (IRS) defines retirement milestones as a guide for retirement eligibility and fee structures. While many people cannot retire until they’re age 65, there are often overlooked pathways to financial independence. This allows for an earlier exit from conventional retirement plans.
This isn’t just about stopping work. It’s about gaining the flexibility to live life on your own terms. While many people work into their 60s and even 70s, there are participants who retire much earlier in life to focus on travel, hobbies, or other business ventures. NerdWallet refers to this as the FIRE (Financial Independence, Retire Early) movement. It makes early retirement less about leaving the workforce and more about flexible work to pursue other interests.
While you may have the ability to retire early, sometimes that means facing early penalties. This includes withdrawal penalties, missing out on Medicare benefits, and other financial considerations. This guide will walk you through the essential considerations, potential challenges, and special circumstances involved in achieving early retirement.
Budgeting for the Future
When planning for the future, it’s essential to save enough money to last the duration of your retirement. For many working 401(k) participants, that may not be a problem. However, if you plan to retire early, you will need to have more money saved for the future. This means covering everyday expenses, medical costs, home repairs, and other miscellaneous fees that fall into necessary and unnecessary categories. Without a consistent income from a career, you may have to adjust your budget and expectations.
If you’re not sure what it takes to secure a financially-sound future, use Slavic401k’s retirement planner calculator. This calculator helps the individual investor create a retirement plan and set realistic goals.
Once you have a good idea of what you need to retire early, you may need to make budget adjustments. This can be done through a variety of tools:
- Use the 50/30/20 budget rule
- Manage your budget digitally through financial apps or budget sheets
- Find ways to supplement income to pay for everyday goods and services
Slavic401k has a variety of blogs that cover retirement, financial planning, and economic trends to help you plan accordingly. View the blog to learn more.
How Early Retirement Impacts Social Security, Medicare, and 401(k) Plans
Social Security
If you’re eligible for Social Security benefits, there are strict guidelines that go into accessing those funds. The Social Security Administration (SSA) uses your birth year to determine when you are eligible for benefits. In most cases, that doesn’t happen until people are between 65 and 67 years old. In some cases, such as early retirement, you can tap into your benefits early, but not before 62 years old. Even then, you will be subjected to a benefit reduction. This means you will not receive the full amount of benefits that you would have if you waited until your full retirement age (FRA). View an FRA chart here.
Medicare
The Balance Money outlines the importance of Medicare benefits for retirees. Because you won’t receive Medicare benefits until you turn 65, whether you retire early, you will need to secure your own healthcare coverage if you won’t have an employer. Private health insurance can have significantly higher costs and coverage may not be as good as a group plan. This can increase service and prescription costs. HealthCare.gov can help you find good coverage at an affordable cost.
401(k) and IRA Plans
If you’re enrolled in a 401(k) or IRA, you are not eligible to withdraw funds until you turn 59½. Because of this, there are stringent rules in place that come with penalties for making early withdrawals. But if you find yourself in the position of retiring early, there is a chance you may need to tap into these funds.
Note: early withdrawals are often subjected to a 10% fee but could change depending on your plan manager and fee structure. While exceptions to the plans exist, they are dependent on the terms of your account. For example, 401(k) plans may allow you to forego penalties if you’re age 55+, but IRAs will not. Check with your plan manager to learn about the terms of your retirement account before filing for early retirement.
Special Circumstances
Special circumstances are considered for those who served in military or civic roles. Because their full-time jobs often begin at a younger age, they are eligible for retirement at a younger age. Therefore military or civic roles canfall into a special category of retirees.
Eligible participants in these roles often have pension plans that allow them to retire with full benefits before reaching their full retirement age determined by the IRS and SSA. The Civil Service Retirement System (CSRS) has different regulations and standards for those who served in the military or civil roles. This includes exceptions to early withdrawal penalties, retirement based on years of service rather than age, disability, and more. Learn more about applying for CSRS benefits here.
Retiring early can be a great benefit, but it also requires proper planning and preparation early in your career. If you’re working towards FIRE (Financial Independence, Retire Early), you will need to save more, earlier in life, make riskier investments, maximize contributions, and perhaps multiple sources of income in order to set yourself up properly. Slavic401k has a guide for FIRE preparation that can help you plan ahead. If you’re looking for additional retirement planning tools, our blog and calculator tools can help you navigate your financial future.
