OT: - Rule of 55 (Retirement) | The Boneyard

OT: Rule of 55 (Retirement)

MexicoHusky

MexicoHusky

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I'd like to retire around 55 (I'm 48 now). Or at least stop working significantly. Maybe have some kind of part time job... a bartender or whatever. I have recently heard of the rule of 55 where you can retire and withdraw on your retirement saving account without penalty. Has anyone utilized this rule? Pros/Cons... things I should consider?
 
You can withdraw from any retirement account, like an IRA or a 401K, at any age. As long as the disbursements are over your remaining life expectancy. You pay taxes, but not the penalty

I don't believe you can change your withdrawals for 5 years under this approach, but then you can adopt a new plan (haven't dealt with this much)

Company controlled retirement accounts, like pensions, may have their own set of rules
 
Depends on what you mean "retire".

1. Medical - Medicare starts at 65
2. Government - Social Security starts at 62 - I advise 67.
3. IRA - RMDs are supposed to be at age 73.
4. Roth IRA - taxable until 59 1/2 but if you have an IRA you can do a Roth conversion ladder and after 5 years - you can withdraw from the Roth.
5. Rule of 55 - that is for 401k or 403b accounts (403 being non profit version of 401)

Hopefully you have enough soft funds to keep you going until those ages, especially if you are bartending or have similar income.

Good luck

I am a Tax Professional licensed by the IRS.
 
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willie99 said:
You can withdraw from any retirement account, like an IRA or a 401K, at any age. As long as the disbursements are over your remaining life expectancy. You pay taxes, but not the penalty

I don't believe you can change your withdrawals for 5 years under this approach, but then you can adopt a new plan (haven't dealt with this much)

Company controlled retirement accounts, like pensions, may have their own set of rules
Expand ...

You can withdraw at any age without penalty, any age

As long as your withdrawals are calculated based on your remaining life expectancy

------------------------------------------


5. Substantially Equal Periodic Payments​

If you’re considering early retirement or need a steady income stream before reaching 59 1/2, you should learn about the Substantially Equal Periodic Payments (SEPP) exception.

It allows you to withdraw IRA funds at no penalty by setting up a series of substantially equal payments based on your life expectancy or the joint expectancies of yourself and your designated beneficiary.

To qualify, you must continue these payments for at least 5 years or until you reach age 59 1/2, whichever comes later.

The amounts you withdraw are calculated using one of three IRS-approved methods.

As you’d expect, this option is complex and requires careful planning to avoid potential pitfalls.
 
I am a teacher in Indiana and the rule for retirement is the Rule of 85. It works like this; age plus years of experience = 85 or more then you can retire and receive your pension. Minimum age is 55.

That is my plan to retire at 55 with 33 years of experience. Then sub in a neighboring district where they pay retired teachers $300 per day. I can be ok with that.
 
There's an alternative approach that I read about recently. Retire for like 2 years, then go back. It allows you to travel or do some of the things you want to do while younger.

I'm 58. My target is 60, so I'll hit the 59 1/2 requirement. The real challenge is healthcare between retirement and Medicare eligibility. That's no joke. My brother in law retired at 55 and it's a significant cost. I've got an HSA and I'm trying to build that up in part to cover the gap.
 
Minicoop69 said:
I am a teacher in Indiana and the rule for retirement is the Rule of 85. It works like this; age plus years of experience = 85 or more then you can retire and receive your pension. Minimum age is 55.

That is my plan to retire at 55 with 33 years of experience. Then sub in a neighboring district where they pay retired teachers $300 per day. I can be ok with that.
Expand ...
I am assuming experience is same as service?
 
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MexicoHusky said:
I'd like to retire around 55 (I'm 48 now). Or at least stop working significantly. Maybe have some kind of part time job... a bartender or whatever. I have recently heard of the rule of 55 where you can retire and withdraw on your retirement saving account without penalty. Has anyone utilized this rule? Pros/Cons... things I should consider?
Expand ...

I read into it a few months ago. Don't ask me why (I'm only 34. lol). I guess its never to early to plan

You can only tap into the 401k (or 403b in my case) of your last employer. You need to be employed by that employer after turning 55 before you leave that employment.

So if you want to have access to other 401k from prior employers you need to consolidate all the funds into the last one.
 
Jewels said:
I am assuming experience is same as service?
Expand ...

Yes, years of experience is years of service. So my age will be 55 and with 33 years of experience it will = 88. But I can't retire before 55 so I have to wait.

I can draw my pension and still work if I choose to.
 
Minicoop69 said:
I am a teacher in Indiana and the rule for retirement is the Rule of 85. It works like this; age plus years of experience = 85 or more then you can retire and receive your pension. Minimum age is 55.

That is my plan to retire at 55 with 33 years of experience. Then sub in a neighboring district where they pay retired teachers $300 per day. I can be ok with that.
Expand ...
That is awesome! But here's the only one potential gotcha:

1. If they pay subs as contractors you get a 1099-NEC with zero taxes taken out. Only thing you can do then to avoid taxes is form a 2 person LLC in Q4 the year before you retire and have it start Jan 1, 202R. You can use the money coming to the LLC for annual meeting with the other partner anywhere in the US or possessions and expense that. In addition to this, you would need healthcare and using an Indiana marketplace vendor personally can be really beneficial on your taxes. The LLC's net income will split to it's members on a K-1 which rolls up to Schedule E and avoids payroll taxes. Then it hops up to Schedule 1.

2. If you are employed by the other district and just paid on the days you teach, then you are really doing well as they will deduct proper SS, Med, Fed, St taxes and give benefits.
 
For any young ones here (early to mid 20s), find a City, County, Federal job that has a pension. Guaranteed money forever is so much less stressful than 401ks or savings in index funds, etc. And you can still put extra into those other things or deferred comp.

Seriously, find a place that provides a pension and go with that!
 
jleves said:
For any young ones here (early to mid 20s), find a City, County, Federal job that has a pension. Guaranteed money forever is so much less stressful than 401ks or savings in index funds, etc. And you can still put extra into those other things or deferred comp.

Seriously, find a place that provides a pension and go with that!
Expand ...

100%. I am 39 and wife is 38. I have a pension because of teaching and she has a pension because of her federal job. Between hers and my pension we would be at $72k per year. I feel like that amount with investments and if we get SSA, we will be doing alright in retirement.
 
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jleves said:
For any young ones here (early to mid 20s), find a City, County, Federal job that has a pension. Guaranteed money forever is so much less stressful than 401ks or savings in index funds, etc. And you can still put extra into those other things or deferred comp.

Seriously, find a place that provides a pension and go with that!
Expand ...

Nowadays its hard to find a job with a pension. the public sector has pensions but tends to pay significantly less.

I say go take a job in the private sector where pay is significantly higher and max out your pre-tax 403b/401k contributions every year. I have been maxing out my contributions for the past 10 years. My wife has been maxing out hers the past two years and will continue to do so. Good tax savings upfront and now have solid savings on my 403b... and I still earn more than the same job in the public sector.

If I stay the course in 15 more years my 403b will be in really good shape.

I guess at the end of the day there are many ways to skin a cat. lol
 
jleves said:
For any young ones here (early to mid 20s), find a City, County, Federal job that has a pension. Guaranteed money forever is so much less stressful than 401ks or savings in index funds, etc. And you can still put extra into those other things or deferred comp.

Seriously, find a place that provides a pension and go with that!
Expand ...
Probably easier said than done however. The number of employers offering defined benefit programs has plummeted and continues to decline. Also, this approach would really limit the kind of work you could pursue and/or where you live. For example, teaching is one of the few occupations that still offers pensions and here in North Carolina, spouses that both teach can hardly make ends meet. Federal jobs are currently being slashed if I'm reading the headlines correctly. Didn't some of the airlines win a decision in court that allowed them to reduce "guaranteed" pension payouts? These are hardly stress-free situations.

Investing in 401k's hasn't been particularly stressful (for me) and it is probably easier to find an employer that offers 100% matching than one that offers a pension. Max out your contributions and look the other way during volatility if it bothers you. You're virtually guaranteed to make out over the course of your career. I prefer this approach to drastically limiting my choices of employers or type of work. Financially, I could retire early but I genuinely enjoy my work so I keep feeding my savings/investments and watch them grow. Find work that you enjoy whether or not it is defined benefit or defined contribution.
 
ecasadoSBU said:
Nowadays its hard to find a job with a pension. the public sector has pensions but tends to pay significantly less.

I say go take a job in the private sector where pay is significantly higher and max out your pre-tax 403b/401k contributions every year. I have been maxing out my contributions for the past 10 years. My wife has been maxing out hers the past two years and will continue to do so. Good tax savings upfront and now have solid savings on my 403b... and I still earn more than the same job in the public sector.

If I stay the course in 15 more years my 403b will be in really good shape.

I guess at the end of the day there are many ways to skin a cat. lol
Expand ...
This would be my suggestion also. Take a job you want in the private sector and make more money but just be disciplined in putting away money for retirement.
 
MexicoHusky said:
I'd like to retire around 55 (I'm 48 now). Or at least stop working significantly. Maybe have some kind of part time job... a bartender or whatever. I have recently heard of the rule of 55 where you can retire and withdraw on your retirement saving account without penalty. Has anyone utilized this rule? Pros/Cons... things I should consider?
Expand ...
Its called a 72t distribution, basically you can start 5 years earlier 54.5 but you sre committed for 5 years. No penalties just ordinary income
 
ecasadoSBU said:
I read into it a few months ago. Don't ask me why (I'm only 34. lol). I guess its never to early to plan

You can only tap into the 401k (or 403b in my case) of your last employer. You need to be employed by that employer after turning 55 before you leave that employment.

So if you want to have access to other 401k from prior employers you need to consolidate all the funds into the last one.
Expand ...
This was my experience when I retired 6 years ago…I was allowed to tap into my 401k at 55 (without penalty) as long as I was employed by that employer when i retired.
 
Peacefrog said:
Probably easier said than done however. The number of employers offering defined benefit programs has plummeted and continues to decline. Also, this approach would really limit the kind of work you could pursue and/or where you live. For example, teaching is one of the few occupations that still offers pensions and here in North Carolina, spouses that both teach can hardly make ends meet. Federal jobs are currently being slashed if I'm reading the headlines correctly. Didn't some of the airlines win a decision in court that allowed them to reduce "guaranteed" pension payouts? These are hardly stress-free situations.

Investing in 401k's hasn't been particularly stressful (for me) and it is probably easier to find an employer that offers 100% matching than one that offers a pension. Max out your contributions and look the other way during volatility if it bothers you. You're virtually guaranteed to make out over the course of your career. I prefer this approach to drastically limiting my choices of employers or type of work. Financially, I could retire early but I genuinely enjoy my work so I keep feeding my savings/investments and watch them grow. Find work that you enjoy whether or not it is defined benefit or defined contribution.
Expand ...
if your employer offers a Roth 401(k) in addition to a traditional 401(k), it can be advantageous for many.
 
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Advice I would always offer to anyone. It's never to early to start saving for retirement. Because retirement age comes around more quickly than anyone anticipates.

If you're an educator or public service employee, chances are you have a pension most don't have. However, I love 401-Ks. You get to accumulate significant assets and they're always yours. Can be passed on to beneficiaries. There are a lot of people that have accumulated millions using that path.

Put money in your 401-K and never touch it, let time do it's thing, you'll be fine.
 
People typically focus on savings and income. Both very important with the emphasis on savings. As for me, it was all about reducing spending and eliminating all debt before retirement.

No mortgage, car payments, loans etc.. is this best financial space to be in, especially in retirement.

Modest lifestyle with no debt will allow you to do practically anything in retirement with a pension and/or ss income. This doesn't really work if one likes expensive things (e.g. cars, clothes, jewelry, etc.).

Just saying since I eliminated all of my debt years ago, I have so much peace of mind, freedom and mobility in retirement. Debt elimination is a sacrifice but pays later in ways unimaginable.

"Buy what you can afford now, so you can afford to buy what you want later."
 
Save on the little things daily, so you can afford the big things you want. Unless you have a money tree in your yard or a money printer in your basement.
 
Kitaman said:
People typically focus on savings and income. Both very important with the emphasis on savings. As for me, it was all about reducing spending and eliminating all debt before retirement.

No mortgage, car payments, loans etc.. is this best financial space to be in, especially in retirement.

Modest lifestyle with no debt will allow you to do practically anything in retirement with a pension and/or ss income. This doesn't really work if one likes expensive things (e.g. cars, clothes, jewelry, etc.).

Just saying since I eliminated all of my debt years ago, I have so much peace of mind, freedom and mobility in retirement. Debt elimination is a sacrifice but pays later in ways unimaginable.

"Buy what you can afford now, so you can afford to buy what you want later."
Expand ...
I think many younger people could benefit from exposure to Dave Ramsey's advice, except on investing, where he's way too conservative.
If you have student loans, you should definitely not have a car loan. Drive something you can buy with cash and pay that down. Debt is your enemy. Don't let credit card debt roll month to month. If you can't pay it off, wait. Max your 401k or similar. Max a Roth if at all possible. Once you are debt free except for a mortgage that you can afford, then you can start thinking about having nice things. Convert any 30 year mortgage to a 15 as soon as possible. The interest savings will be huge.

Your goal should really be to become a net investor who earns a lot more in interest and dividends than your pay. Wealth creation is largely about crossing that divide.
 
Yes, where at all possible have money in high dividend and interest earning accounts: Most traditional banks pay 0.05% interest while online banks are in the 3, 4, 5% range.

Real estate is also powerful if you are handy and can improve a property it makes a lot of sense to have it in a 2-person LLC for best asset protection and benefits.

Roth > Traditional (IRA and 401k). As Roth means at 59 1/2 you can raid it like an ATM with no tax consequences when you do.
 
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