In today’s episode, you’ll learn more about:
- Why age 59½ matters—and why it doesn’t necessarily determine when you can retire
- Planning opportunities including the Rule of 55, 72(t), and Net Unrealized Appreciation (NUA)
- Why taxable brokerage accounts, Roth IRA contributions, and cash reserves can create flexibility
- Building a retirement income bridge before Social Security, pensions, and Medicare begin
- Healthcare planning before age 65, including COBRA and ACA Marketplace coverage
Listen Now:
The Smart Take:
Many people assume they have to wait until age 59½ before they can retire because that’s when retirement accounts generally become available without the 10% early withdrawal penalty. But in reality, early retirement is often less about how much you’ve saved and more about how you access your money.
In this episode, Tyler Emrick, CFA, CFP® discusses the planning strategies that can help bridge the gap before traditional retirement account access, why saving across different account types creates flexibility, and how thoughtful income planning can make early retirement a realistic option.
Retiring before age 59½ is absolutely possible. The key isn’t simply avoiding an early withdrawal penalty. It’s just as important to coordinate your investments, taxes, healthcare, and income sources into a retirement plan that supports the lifestyle you want.
Go Inside the Episode:
0:00 – Intro
2:20 – 3 ways to access retirement accounts before 59.5
7:46 – Where else does money come from?
9:40 – Planning becomes essential
12:13 – Healthcare options
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
One of the biggest misconceptions I hear is that you have to wait until 59 and a half before you can pull the trigger and retire. While that’s generally the age retirement account withdrawals become available without that hefty 10% early withdrawal penalty, it doesn’t necessarily mean you have to wait until you stop working. If you’re planning to retire in your 50s, the question isn’t just, “Do I have enough money?” It’s also, “How do I access my money?” which is just as important. Today we’ll discuss some of the planning strategies you can make retiring before age 59 and a half possible, why saving across different account types creates flexibility, and why distribution planning is just as important as investment planning when it’s all said and done.
Walter Storholt:
Hey, we’re back for another episode of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. Of course, he’s a CERTIFIED FINANCIAL PLANNER and a chartered financial analyst, and one of the wealth advisors at True Wealth Design, helping folks all across the country get to and through retirement and just plan financially for better lives. We’re having a great conversation today, Tyler.
Tyler Emrick:
Heck yeah.
Walter Storholt:
Because I just turned 39, so I’m going to be 39 and a half before we know it. It got me thinking, that puts me exactly 20 years out-
Tyler Emrick:
These half ages. Ugh.
Walter Storholt:
… from 59 and a half, which happens to be that magic number that’s sort of leading our episode today.
Tyler Emrick:
It is.
Walter Storholt:
You got me thinking about retiring a little earlier, and 59 and a half sounds pretty good now 20 years from now.
Tyler Emrick:
Nothing wrong with that. Hey, it’s always good to be thinking about retiring early, right? I mean, that’s a good topic to get at. If this is on any of our listeners’ radar, first off, congratulations. If you were talking about or considering retiring in your 50s or even in your early 60s, what an accomplishment, and that’s awesome. Right?
Walter Storholt:
Yeah. Even if you’re not quite ready for it, the fact that you’re even thinking about it shows you’ve probably worked really hard and done a good job.
Tyler Emrick:
You’re getting closer, right? Exactly. Exactly. Well, Walt, as you think about some of the challenges, which I think about kind of like the meat and potatoes today, is like, what are the challenges that are going to be ahead of you if you’re really wanting to kind of go outside the box there, pull the trigger, and do it a little earlier maybe than what most people would expect? Not only is this big overarching question on like, “Well, have I saved enough? Do I have enough?” Certainly, I think that’s very important, but what kind of goes through my mind when I hear that initial like, “Ooh, I want to go early,” is like, “Where’s my money going to come from? What am I going to live off of? How am I going to access it?”
I think it’s been so ingrained, at least in me being in the financial industry all these years, that age 59 and a half. I think a lot of people think about that age too because it’s like, “Hey, the old adage is, if you’ve got money in your retirement accounts, you can’t touch it until you turn 59 and a half.”
Walter Storholt:
Right.
Tyler Emrick:
Right?
Walter Storholt:
Yeah. It’s not even an option to dip into that money and use it and plan to retire. No one wants to pay that penalty, right? That doesn’t make financial sense.
Tyler Emrick:
Penalties are never good. No, absolutely.
Walter Storholt:
Yeah.
Tyler Emrick:
I think oftentimes too, as an advisor, it’s always fun when we can break up and be like, “Well, there are a few situations where you could actually pull your money out of your retirement accounts before 59 and a half.” Some of the unique ones, or probably my favorite one, might as well throw a few of them out here, this could very well come in your situation if you’re wanting to retire before 59 and a half, is Rule of 55. I don’t know if I love the name, Rule of 55, but you essentially-
Walter Storholt:
You’ve got a lot of rules of even a number, so throw another one in the pile.
Tyler Emrick:
Throw it in there, throw it in there, right? But it is actually speaking to the age of 55. So what it is is, it’s essentially this idea that you work for an employer, a lot of times you have a 401(k) tied to that employer. If you leave that employer after the age of 55, you can actually do penalty-free distributions from that retirement plan, that 401(k) specific. So this isn’t like a global rule across all your retirement accounts because inevitably, Walt, I mean, most of my individuals that I work with through retirees, hey, they might have a few different retirement accounts out there. Maybe you switch jobs, maybe you have an IRA account or a Roth or something like that. But for that particular retirement account through the employer that you leave in the year you turn 55, you would be able to withdraw money from that account without paying the 10% penalty.
Walter Storholt:
Is that mostly because if somebody gets laid off and they’re over 55, is the government trying to say like, “Hey, that’s a tough time to get laid off so you have some access to this account”?
Tyler Emrick:
Yeah, sure. It could be.
Walter Storholt:
To soften the blow maybe a little bit.
Tyler Emrick:
But they don’t differentiate, right?
Walter Storholt:
Okay.
Tyler Emrick:
So it could be a layoff. It could be you just leaving the firm. It could be you retiring. It could be any separation. Now, obviously-
Walter Storholt:
But like you’re saying, it doesn’t give you access to then go to all of the accounts, just the one with that current employer.
Tyler Emrick:
Yep, and whatever balance that you would have into there. So if you’re doing a little bit of planning, I’ve had individuals roll some money into a 401(k) plan to kind of set themselves up to increase the balance inside that account, if we were looking at bigger distributions from that account down the road.
So that’s a quick caveat there, Walt. I mean, these 401(k) plans and employer plans, they’re all different. They like to keep it very complex. At least it seems that way. Some employer plans allow you to move money into them. Some don’t. Some don’t allow you to do distributions. Some allow you to do as many distributions as you want. So understanding what rules your retirement plan has through your employer, I think, is a big kind of caveat here as you’re thinking about, “Hey, am I going to use this Rule of 55 and potentially get access to distributions from it without having to pay that 10% penalty?” So Rule of 55 is a big one. It’s probably the easiest one to take advantage of and probably provide you the most flexibility if your employer allows it. There are a couple other ones that aren’t necessarily as widely used. The names aren’t getting any better here, Walt. 72(t) is the other one.
Walter Storholt:
Now, there’s a Rule of 72, but this is different than that.
Tyler Emrick:
Yeah, it is.
Walter Storholt:
We can’t keep our rule of going with this one.
Tyler Emrick:
No, no, not at all. But 72(t), now this is applying to your individual retirement accounts. Essentially, it allows you to set up substantially equal payments out of a particular IRA account. As long as you follow the rules and you set it up in a way that qualifies for this 72(t) exclusion, then those distributions then would not be subject to the 10% early withdrawal penalty. So that’s another one to potentially look at.
And then the third that I wrote down, which I kind of just snuck it in here, it’s probably not going to apply to too many individuals in here. But if we do have a listener that has company stock inside of their 401(k) and they’ve had it for a long period of time and that stock has gained a lot in value. A lot of companies in here in Northeast Ohio, there’s a handful that come to mind that this situation applies to. We could potentially be taking advantage of what’s called net unrealized appreciation or NUA, which allows us another way of us for potentially getting money out of retirement accounts, specifically 401(k)s, in a tax-efficient manner.
So I wanted to lead off the episode here, kind of just given some of the nuts and bolts of like, “Hey, 59 and a half doesn’t have to be as big a deal or a big hurdle as we think about here, because there are a few things we could do to maybe get around it.” But, Walt, if you’re thinking about retiring early, you probably are starting to think about beyond just your retirement accounts. You’re thinking about-
Walter Storholt:
It sounds like you almost have to. Yeah.
Tyler Emrick:
A lot of times you do. Well, what do you have in your savings, your taxable brokerage accounts? And how could you potentially use some of those accounts to help kind of bridge that gap? Which is kind of an important concept. When I say bridge gap, what am I actually referring to? Well, most individuals, when they think about retirement, they have a few ages in mind. One that comes to mind to me is 65. Well, 65 is when you get access to Medicare, right?
Walter Storholt:
Yeah.
Tyler Emrick:
Okay. A lot of people think they got to work till 65 to get that Medicare. Another one would be 62. 62 is the first year that you can start your Social Security payments. So a lot of individuals kind of equate starting Social Security, retirement, start getting some of that money that you paid in all those years. By the way, you do not have to start Social Security at 62 if you’re not working. Definitely keep that in mind. We’ve done plenty of episodes on Social Security claiming strategies over the years. Go catch some of those if you’re thinking that way. But these ages-
Walter Storholt:
But people who are thinking of retiring early, no surprise they’re really keying in on that early access.
Tyler Emrick:
Oh, they are. All right, well, hey, nothing before 62. Even pension plans, Walt, a lot of them, 65 is like, if you take your pension plan before then, there could be some things that you give up. Not all, but some. Pension plans, they got a lot of quirks and features in there you got to kind of be aware of. So they all can be a little bit different. But the idea is still the same. It’s this idea of like, “Well, where am I going to get the money that I need to live off of and how am I going to do it in a tax-efficient way?”
I think it also comes back to, too, and what we’re overarching getting to here, Walt, is that you’re going to have to have some type of plan in place to really start to game plan. “Well, how am I going to do this? I don’t have the typical income sources for a handful of years or maybe longer. All right. I need to have some type of plan in place to figure out, where is this money going to come from? What types of accounts am I going to use, and what am I going to live off of?”
It is extremely important and extremely doable to be able to retire early, Walt. It just makes that planning side of it that much more imperative and that much more important to kind of get right. Because let’s be frank, if you’re retiring early and you need to use some of your money, there’s the emotional aspect of like, hey, you worked your entire career, you saved. You’re making that switch, right? And you’re going to probably have to start using some of your own assets to live off of until some of these bigger things like pensions, Social Securities, and the like actually start to kind of kick in. Walt, that can be a struggle.
Walter Storholt:
You might get told at this time too that like, “Hey, you’re using funds that you didn’t expect to be using until maybe much later,” or pulling it from a pot you weren’t expecting to if you weren’t doing this long-term planning in advance.
Tyler Emrick:
Oh, you got it. Well, hey, for most of your working career, you’re probably used to your account going up and to the right, right?
Walter Storholt:
Right.
Tyler Emrick:
I mean, certainly markets can be volatile, but if you’re saving into your retirement plans, they’re going. When you start seeing them go down, especially early in retirement, I think leaning on your plan is kind of what that saving grace can be and give you the confidence to be able to do it. “Hey, my accounts are going to start at X. They’re going to probably drop to Y over the first handful of years.” Let’s get that ingrained in our head and our mind to get… You’re never probably going to get super comfortable with it, but let’s know it’s part of the plan, and you can lean on it, and you can feel confident. Because hey, if you get into retirement and you’re not confident about your spend, well, how are you going to live the way that you want and enjoy the actual decision of retirement and use all that wealth that you’ve kind of accumulated over the years?
Walter Storholt:
To the point that you get rid of all that stress that working and everything else was bringing you. So if you’re not solving that problem-
Tyler Emrick:
Then, hey, why are we adding a whole different one? That transition is imperative to think about. We talk about it all the time.
And then the last thing is, I really wanted to get, hey, it’s possible to go before 59 and a half. Let’s get a few of those handful items like age 55 rule, 72(t). Let’s frame it in the standpoint of like, be prepared to start using those assets and thinking outside of maybe just your retirement accounts. But I would be remiss if I didn’t at least bring up health care. It’s a concern, right? You’re going to have to figure out how you’re going to get health care. How are you going to be able to get reasonably priced health care? There are a number of options out there.
I don’t want to turn this into a healthcare episode, but we’ll rattle off. I mean, you can get COBRA potentially for 18 months, maybe longer depending on your situation. There’s the ACA or Obamacare plans that are out there. Certainly, if a spouse is working, jumping on them. And all sorts of other potential options depending on what that retirement looks like for you, that if you’re working with a good advisor, you’re working with a planner, that is going to be part of that planning piece of, “Hey, what is that likely expense? Where are we going to go? What’s a worst-case scenario if you have a health event and you need to cover it? How are you going to protect yourself and prepare yourself for those?”
I think that’s what goes back into that overarching planning. But know that there are options out there. Those options are heavily dependent on income potentially. What you’re doing in retirement, what state that you’re in, what ZIP code that you’re even in will really even determine what some of those options are available to you and afford to you through there, Walt. So that’s a very, very important conversation as we start to think about, “All right, where’s my money going to come from? All right, what are some of the risks?” Health care is out there. Let’s get a game plan for it and start thinking about it.
Walter Storholt:
To go football analogy, it feels to me like, retiring at 65 or later, you’re playing with a full team. You’ve got all your normal players on the field. Everybody’s available to you to use in the game. You’re feeling pretty good about that. Retiring between 59 and a half and 65, we could even further divide it with that 62 number, but somewhere in that range, you got a few injuries. So a few of your normal players aren’t available to take the field, but you’ve got backups. So you just have to utilize them effectively.
Tyler Emrick:
You can still get the W.
Walter Storholt:
Before 59 and a half, we’ve had some players leave the team, some disqualifications. We’ve got to bring in some free agents. We’ve got to get a little bit more creative, a few replacement players.
Tyler Emrick:
We do.
Walter Storholt:
It’s still doable, but it’s got the challenges mount, and so we’ve got to be even more dialed in and particular about things.
Tyler Emrick:
It is doable. We have had more than a handful of families, individuals, and clients that have retired in their mid-50s. I’ve even had early 50 retirement dates, especially for government employees that have some of these special pensions that are available to them. So depending on your situation, it’s different for everybody. Just don’t think that a number, you have to hit it, and it’s there. Take the time, have a good productive conversation with whoever you do your advising with, and see what potentially would be possible. And that would be the big takeaway, for sure.
Walter Storholt:
Hey, don’t just accept maybe the 10% penalty, “Oh, well, I’m going to have to pay that anyway in order to live.” Maybe not. Maybe there’s other ways to work around that and you can conserve that 10%, which who wouldn’t want to do that?
Tyler Emrick:
And you go from there.
Walter Storholt:
So don’t make those assumptions, please. Yeah. Makes sense. Well, very good. Thank you so much, Tyler, for the information and guidance today. It’s a great chance for us to remind folks that if you do have questions about this, do you want to retire before 59 and a half or at any of those ages that do present some additional challenges? Even if it’s a normal retirement, so to speak, don’t hesitate to reach out. The way that Tyler and his team work at True Wealth Design is they set up discovery calls to see if you’re a good fit to work with one another.
You can click the link in the description of today’s show to schedule that time to visit. It’s just an initial 20- to 30-minute conversation about you, your goals, where you are right now, and see if you’re a good fit to work with one another and move forward. You can schedule that time to meet again, truewealthdesign.com, look for the Let’s Talk button, or simply click the link in the description of today’s show and go from there. Tyler, thanks for all the help. We’ll talk soon.
Tyler Emrick:
Yeah, we’ll see you.
Walter Storholt:
Yeah, we’ll see everybody next time right back here on Retire Smarter.
Speaker 3:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
