Early Out: A Realistic Plan To Retire Younger

By Lisa Smith AAA

In 1977, country singer Johnny Paycheck scored a No.1 hit on the singles chart with "Take This Job and Shove It". The song's popularity reflected how many people feel about the daily grind of working for a living. For many, retirement is the way out - and it's something most people would like to achieve sooner rather than later.
Sadly, that dream is all too often pushed aside when what should be the light at the end of the tunnel turns out be the headlight of a financial locomotive, bearing down with the combined weight of inflation, healthcare, food, clothing, shelter and all the other expenses that empty wallets and keep people trudging backing to work day after day.

Is there any hope for an early escape from the rat race? Let's take a look at the realities of retirement for the average worker in the United States.

Standard Retirement Age
Age 65 was once the magic number for retirees. Once you hit that age, you were eligible for full Social Security benefits and could trade your day job for a paycheck from the government. For younger workers, that's no longer the case. A graduated scale of eligibility, shown below, increases the age for eligibility to receive full retirement benefits from age 65 for workers born in or before 1937 to age 67 for workers born in 1960 or later.

Year Of Birth Age To Receive Full Social Security Benefits
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-54 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67
Figure 1

Early Out
If you wish to retire earlier, partial Social Security benefits are available at age 62. Just be aware that not only are your benefits cut if you take this option, but so are your spouse's benefits (if your spouse has earned little or no benefit on his or her own). Your spouse is eligible to receive 50% of your benefit amount, based on the amount you would receive at full retirement age. That 50% is then reduced by the amount listed in Figure 2, below.
If your spouse earned enough income to receive a benefit of his or her own that is larger than the amount provided under your benefits, the larger benefit applies. (Read Retiring Early: How Long Should You Wait? for insight into how to maximize your Social Security benefits by choosing when you retire.)

Year Of Birth Approximate Reduction For Primary Wage Earner Spouse Reduction
1937 or earlier 20.00% 25.00%
1938 20.83% 25.83%
1939 21.67% 26.67%
1940 22.50% 27.50%
1941 23.33% 28.33%
1942 24.17% 29.17%
1943-54 25.00% 30.00%
1955 25.83% 30.83%
1956 26.67% 31.67%
1957 27.50% 32.50%
1958 28.33% 33.33%
1959 29.17% 34.17%
1960 or later 30.00% 35.00%
Figure 2

If you have an employer-sponsored retirement savings plan, such as a 401(k) plan or 403(b) plan, age 62 is when you can access your money with no penalties for early withdrawal. The extra cash from Social Security could be enough to help you get out of the game before you reach the traditional full retirement age. (If planning for retirement has you confused, check out our Retirement Plans tutorial.)

Earlier Out
If you want to opt out of the workforce even earlier, you can consider doing so before age 59.5, provided you have a significant nest egg in your employer-sponsored savings plan. Instead of waiting for Social Security eligibility, you can shave off a few working years by accepting "substantially equal distributions" from your employer's plan for at least five years or until you turn 59.5 (whichever is longer). The downside of doing so is that you don't want to damage your eventual Social Security benefit by having too many years where you don't earn an income factored into the calculation that determines your benefit. If you have a high-paying job, the last few years of your career are likely to represent your highest lifetime earnings. (Read Rules Regarding Substantially Equal Periodic Payment (SEPP) to learn more about this option.)

Another option is to take a part-time job. This puts money in your pocket and may provide medical benefits. You will need to keep this job for less than a decade before you become eligible for Social Security. Working part-time also serves as a transition that will help you acclimate to the massive lifestyle shift that occurs when you go from working all week to having no job at all. (Read Journey Through The 6 Stages Of Retirement to learn more about the emotional adjustments associated with leaving the workforce.)

Earlier Still
If age 59.5 isn't early enough for you, chances are you will either need to be rich, frugal, or both in order to retire. If you're rich, which we will define as having enough money that you don't need to work at all, then you are in great shape.

If not, you'll need to figure out just how little you can live on what you have. Are you willing trade that upscale condominium for a cabin in the woods? Can you give up fine dining, new cars, new clothes and vacations to Europe for a rocking chair and the sound of the wind in the trees? If you can handle massive lifestyle changes and the spending habits they require, you may be able to retire on your own terms at an age significantly younger than most retirees. (Read Life After Retirement for some personal finance tips about how to pay the bills after work ends.)

Considerations
Regardless of your age when you decide to step out of the workforce, you'll have to put some serious thought into the risk of outliving your savings. With life expectancies on the rise, outlasting your income stream is a very real possibility, particularly if you received a lump-sum payout to retire early. (Read Inflation-Protected Annuities: Part Of A Solid Financial Plan for one investment strategy that can help minimize inflation and longevity risk.)

Of course, smart investing can help you overcome this challenge, but you need to carefully balance the need for income against the need for growth. Low-risk investments, such as certificates of deposit and Treasury inflation-protected securities (TIPS), can provide an income stream, but you may need exposure to equities to see your assets grow. Adding equities is a double-edged sword though, as the potential for gain also exposes you to the possibility of loss.

Beyond the financial considerations, you also need to think about the mental aspects of early retirement. Many people identify themselves by the work they do. Once they stop working, the loss of identity can be a challenge. Similarly, many people rely on their coworkers for social interaction. When they stop working, they lose their friends.

Before stepping out of the workforce, make sure you are both financially and emotionally prepared to deal with the consequences. Making the change is a life-altering event. Advanced planning can help you set a solid course as you start the next stage of your life.

Bottom Line
The Social Security system is not designed to support early retirement, so if you want to stop working ahead of schedule, it will take some extra planning. However, you do have options, especially if you can live frugally or have already accumulated a substantial nest egg on your own. Consider both the financial and emotional impacts of retiring early to make the best decision for your situation.

To learn sensible strategies for making your hard-earned savings last for as long as you need them, read Managing Income During Retirement and Stretch Your Retirement Budget.

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