Contributed by: Sandra Adams, CFP®
As a financial advisor, one of the most common questions I hear from clients considering early retirement is: "How can I access my retirement funds before age 59 ½ without penalty?" If you are asking that too, let's discuss an often-overlooked option: the Rule of 55.
The Rule of 55 allows you to withdraw money from your 401(k) or 403(b) without the usual 10% early withdrawal penalty if you leave your job in the year you turn 55 or later. This can be a helpful tool if you are retiring early and need income before other sources like Social Security, pensions, or IRAs kick in.
Here is the key: this rule applies only to the retirement account with your most recent employer. It does not work with old 401(k)s you have rolled into an IRA, so timing and account structure matter. That is why reviewing your plan before making any moves is important.
I have worked with clients who successfully used the Rule of 55 to bridge the income gap during early retirement—while keeping their long-term investments on track. With the right strategy, it can be part of a broader plan that balances your ability to draw income now with the freedom to draw from other sources of income later. And even if you don't ultimately need to draw on the funds, but you might, keeping at least a portion of your 401(k) balance in-tact to allow you the ability to draw on it "in case" could be a smart move until you reach that magic age 59 ½ if you haven't built up significant reserve savings or after-tax investment account balances to draw on.
If you are thinking about retiring before 59 ½ and may need access to your retirement savings, it is best to map out the best path for your unique situation. There's no one-size-fits-all solution, but with careful planning, you can avoid surprises and make the most of your hard-earned savings.
Early retirement is possible—just make sure you are stepping into it with a plan that supports your lifestyle and your future. If you or anyone you know is considering early retirement and might need to think through their options, do not hesitate to reach out. We are always happy to help! Sandy.Adams@CenterFinPlan.com.
Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Sandy Adams, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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