Can I Retire at 59? Key Financial Considerations

Retiring at age 59 is an appealing prospect, offering the chance to pursue personal interests and enjoy life beyond work sooner. Navigating this transition requires careful planning, as financial and logistical considerations arise for individuals leaving the workforce before traditional retirement ages. Understanding how to access retirement savings, secure healthcare, and manage income sources is crucial for early retirement.

Accessing Retirement Savings Before Age 59.5

Withdrawing funds from qualified retirement plans, such as 401(k)s, 403(b)s, and IRAs, before age 59.5 generally incurs a 10% early withdrawal penalty in addition to ordinary income taxes. This penalty applies to the taxable portion of the distribution.

There are specific exceptions to this 10% penalty. One exception involves Substantially Equal Periodic Payments (SEPP), also known as 72(t) distributions. This rule allows penalty-free withdrawals from various retirement accounts, including IRAs and employer-sponsored plans, provided a series of payments is taken over a minimum duration of five years or until the account holder reaches age 59.5, whichever period is longer.

SEPP calculations must adhere to one of three IRS-approved methods: the Required Minimum Distribution (RMD) method, the fixed amortization method, or the fixed annuitization method. Once initiated, the chosen method must be followed strictly, as modifications before the required period can trigger retroactive penalties.

Another exception for employer-sponsored plans like 401(k)s and 403(b)s is the Rule of 55. This rule permits penalty-free withdrawals if an employee separates from service in or after the year they turn 55. The Rule of 55 only applies to the 401(k) or 403(b) plan from the most recent employer and does not extend to IRAs or plans from previous employers.

While these exceptions can help avoid penalties, all withdrawals are still subject to ordinary income tax.

Bridging the Healthcare Gap Until Medicare

Healthcare coverage is an important consideration for those retiring before age 65, as Medicare eligibility begins at this age. Individuals retiring at 59 will need to secure health insurance for six years until they qualify for Medicare. This period requires careful planning to avoid substantial out-of-pocket medical costs.

One option for continued coverage is COBRA. COBRA allows eligible individuals to continue their employer-sponsored health insurance for a limited period, typically 18 months, by paying the full premium plus an administrative fee. While COBRA maintains the same benefits as the former employer’s plan, its high cost and limited duration mean it often serves as a temporary bridge.

The Affordable Care Act (ACA) Marketplace offers another avenue for health insurance. Plans available through the ACA Marketplace cannot deny coverage based on pre-existing conditions. Eligibility for premium subsidies, which can significantly lower monthly costs, is based on income. These plans allow individuals to choose a plan that balances premiums with deductibles and out-of-pocket maximums.

Purchasing private health insurance directly from an insurer outside the ACA Marketplace is also an option. These plans may be more expensive, especially without the potential subsidies available through the Marketplace. If a spouse is still working, joining their employer’s health plan might be the most cost-effective solution, providing comprehensive coverage at group rates. Budgeting for healthcare expenses is an important part of early retirement financial planning.

Developing a Sustainable Early Retirement Budget

Creating a detailed and realistic budget is essential for a sustainable early retirement. This budget should encompass both essential living expenses and discretionary spending.

A key concept in retirement planning is the “safe withdrawal rate” from investment portfolios. For early retirees, who face a longer retirement horizon, a more conservative withdrawal rate is advisable. While the traditional 4% rule has been widely discussed for a 30-year retirement, a rate closer to 3% to 3.5% might be more appropriate for a longer period. This lower rate aims to enhance the probability of the portfolio lasting throughout an extended retirement.

Investment strategies for early retirement require a diversified portfolio that balances growth with income and capital preservation. Maintaining a diversified portfolio, including a mix of stocks and bonds, can help cushion the impact of market downturns.

An important challenge for early retirees is “sequence of returns risk,” which refers to poor investment returns early in retirement. Negative returns in the initial years, when the portfolio balance is largest and withdrawals begin, can significantly deplete savings. Strategies to mitigate this risk include maintaining a cash buffer for one to three years of expenses, which reduces the need to sell investments during market downturns. Adjusting spending based on market performance is another approach.

Other assets beyond traditional retirement accounts, such as taxable brokerage accounts or real estate, can serve as additional income sources or financial buffers during periods of market volatility. Regular review and flexibility are important, allowing for adjustments to the financial plan as circumstances evolve.

Understanding Social Security and Other Income Sources

For individuals retiring at age 59, Social Security retirement benefits are not immediately accessible. The earliest age to claim Social Security retirement benefits is 62. This means there will be a gap of at least three years between retiring at 59 and the earliest possible Social Security claiming age.

Claiming Social Security benefits at age 62, or any age before one’s Full Retirement Age (FRA), results in a permanent reduction in monthly benefits. The Full Retirement Age varies depending on the birth year, gradually increasing to 67 for those born in 1960 or later. This reduction remains fixed for the duration of benefit receipt.

Conversely, delaying the claim for Social Security benefits beyond one’s Full Retirement Age, up to age 70, can increase monthly payments through delayed retirement credits. These credits can boost benefits by approximately 8% per year for those born in 1943 or later.

Beyond Social Security, other income sources can supplement retirement savings. These may include pension payments from former employers, part-time work, consulting, or starting a small business. Rental income from properties owned can also contribute to financial stability. Annuities can provide guaranteed income streams. The strategy for claiming Social Security, even if deferred, is an important part of a comprehensive retirement plan.