Frequently Asked Questions
Q: What is the “Rule of 55” and can it help me avoid early withdrawal penalties?
A: The Rule of 55 is an IRS provision that allows you to withdraw money from your current company’s 401(k) or 403(b) plan without the 10% early withdrawal penalty if you leave that job in or after the year you turn 55. It’s a useful exception, but it only applies to the 401(k) at the company you are leaving; it does not apply to previous 401(k)s or IRAs. Be aware that these withdrawals are still subject to ordinary income tax.
Q: Can I work part-time and still collect Social Security benefits before my full retirement age?
A: Yes, but there are limits. If you are under your full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit is $22,320. The rules are more generous in the year you reach your FRA. This earnings test disappears once you reach your full retirement age, at which point you can earn as much as you want with no reduction in benefits.
Q: How much should I realistically budget for health insurance before I turn 65?
A: This varies widely by state, age, income, and the level of coverage you choose. However, it is not uncommon for a healthy couple in their early 60s to pay between $1,500 and $2,500 per month ($18,000 to $30,000 per year) for a mid-level ACA Marketplace plan. This does not include deductibles or other out-of-pocket costs, which can add several thousand dollars more per year.
Q: What happens if I retire early and then realize it was a mistake?
A: This is a very real possibility. Re-entering the workforce after even a few years away can be challenging, as skills may become outdated and age discrimination can be a factor. This is a strong argument for a “phased” retirement, where you transition to part-time work or consulting before cutting off employment income entirely. It keeps your skills sharp and your professional network active, giving you a much easier path back to work if you need or want it.
Q: What is “sequence of returns risk” and why is it so dangerous for early retirees?
A: Sequence of returns risk is the danger that a major market downturn occurs right after you retire. If your portfolio loses 25% in your first year of retirement, and you also withdraw 4% for living expenses, you are selling your investments at their lowest point and permanently damaging your portfolio’s ability to recover. The same 25% drop happening 15 years into your retirement is far less damaging because your portfolio has had more time to grow. An early retiree has a longer timeline, which increases their exposure to this critical early-stage risk.
Disclaimer: This article is for informational purposes and is not a substitute for professional financial or tax advice. Consult with a certified financial planner or tax professional for guidance on your specific situation.
