Early (pre-Age 65) Retirement

[elessar78]

I have a question about the logistics of retiring earlier than the prescribed age.

I'm 35. If I hit my 7-figure goal before the next 30 years (hopefully way sooner than that), how do I need to structure my investment savings so that I can access the money, say, at age 50 since I won't have reached the 59.5 age requirement. The one that says I can withdraw interest earnings tax free?

Do I just keep money in a separate "short-term" account for the intervening years?

Is this an irrelevant concern?

[97guns]

i had all my funds in cd's and was pretty happy getting 4-5%, when interest rates vanished i started looking for a better place to park funds and moved it all into real estate. obviously it is not liquid like a cd but its making me 10-12% return on my money and that was enough for me to retire

the key to retiring pre retirement age is having a source of cash flow, rentals for me. its a great feeling to have no reliance on social security or pension.

[kork13]

It's definitely a VERY relevant concern, and definitely something you should be prepared for. To retire at 50, you'll want to have at least 10-12 years worth of anticipated expenses available before you turn 60 (shot in the dark guesstimate: $500k-$600k). Your best two options that immediately come to mind would be:

1) Save aggressively into regular (taxable) savings & investments. This is the obvious answer, and also the safest.
2) Max out any and all Roth contributions you can (both IRA & 401k) for both you and your spouse. When you retire, you'll still be able to withdraw your original contributions (tax & penalty free) to those accounts. Depending on how much you've already contributed to these accounts, it COULD be the most optimal solution, but realistically, this should probably only be a supplement to your taxable savings/investments.

Please, whatever you do, please please please, do NOT buy in to an insurance policy (whole/universal/other life insurance) as a savings tool. I'll simply say it's most likely not a good option for you, and leave it at that.

Last feasible option that comes immediately to mind (if you're the entrepreneurial type) would be to build up a portfolio of real estate properties that could be rented out to provide for your living expenses. Again, this income should only be a supplement to taxable savings/investments, and you definitely don't want to take on excess risk (e.g., massive debt) in order to achieve this end.

All in all, it's totally possible, with some solid planning, a healthy income, and aggressive saving. Just beware the danger of under-estimating... Better to plan for the worst, for your own security & peace of mind.

[Petunia 100]

You can access your tax-deferred monies penalty free by following 72t rules. You do give up flexibility.

[MonkeyMama]

Definitely a very important question!

Other thoughts on this scenario:

Money in a ROTH IRA is easier to access, so you may also want to consider any ROTHs for this purpose.

The period of age 50-60 can easily be a very low-income-tax/non-income-tax situation. When you factor that, and how much you need to live on, you may not need near as much as you think for those 10 years. For this reason, working a little longer and saving most the income (just a few years) can significantly tide you over. Also, consider just keep working very minimally to pay expenses. If you aren't saving for retirement or paying any social security or income taxes, it's surprising how little you may actually need to live on.

Don't forget that money/nest egg that you are not touching is still compounding. You can still work that to your advantage in early retirement. This is a lot of what Mr. Money Mustache talks about in his blog.

[jIM_Ohio]

You can access your tax-deferred monies penalty free by following 72t rules. You do give up flexibility.

I second 72t
I second contributing to a Roth
I would also add

This is why you plan and learn. If you think this is realistic, plan for it. Do it by adding to taxable accounts. If you have money in a 401k, some 401ks can be accessed before age 59.5 too, check the plan rules, if you roll it into an IRA, the 59.5 rule now comes into play. Plan.

If you retired at age 50, what would you do to pass time? If a lower paying job (like owning a small business) is part of the plan, realze you may not need to replace 100% of your current income.

Plan
Learn
Plan again
Learn again

[disneysteve]

You can access your tax-deferred monies penalty free by following 72t rules. You do give up flexibility.

Make sure you understand this option. I know someone who planned to do this. When his accountant actually sat down and ran the numbers with him, it turned out to not be a viable option. The withdrawals are based on your life expectancy so if you are retiring early, you may find that you really can't take out as much as you'll need if they are using a 30-year schedule.

[JustBill]

It may be helpful to visit www.72t.net

[feh]

Previous posters have covered the situation pretty well - I won't repeat what they've stated.

Bottom line - you need to save in vehicles other than those commonly deemed as "retirement". My current plan is to retire in 3 years at age 50. Our savings are split 50/50 between taxable and tax-advantaged. That's the only reason early retirement is an option for me.

[wjcalderon]

You can access your tax-deferred monies penalty free by following 72t rules. You do give up flexibility.

I retired in 2006 under 72T plan. The amount I was able to withdraw was a little less than I hoped for, but I didn't have to pay FICA or Medicare taxes and my state doesn't tax retirement income, so it worked for me.
A couple of years ago, I was offered a part time job (2 days a week) and that has helped me to be able to buy or do a few things that I couldn't otherwise afford on my retirement income.
I will turn 59.5 in just a couple of weeks and my plan is to continue the withdrawals at the same rate.

[Petunia 100]

Here is a nifty calculator with more info on 72t rules:

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

[97guns]

http://amateurassetallocator.com/2009/01/14/the-best-income-generating-assets/

The key to financial independence (or “findependence” if you hate two-word phrases), is not a high-paying job or even a high net worth. Sure, having a high-paying job will help you obtain a high net worth quicker, which in turn will allow you to invest more in income-generating assets to fuel future spending (sans job). But it is those income-generating assets, not the high-paying job, that will secure your financial future