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Cut Down on Spending
Live More CheaplyThis may be easier than you think. First, imagine the day when you'll no longer have to lay out money for soccer shoes or school tuition for your kids, and deduct that amount from your budget. Then take out your commuting expenses, and the money you spend on downtown lunches and lattes. Subtract the money that won't be siphoned off for Social Security, Medicare, or other payroll taxes, or in income taxes if your income drops. Now you should have a sense of what you really need to live on -- and how you will be able to cut costs when you retire.
Greaney, for example, says he lives frugally, but well, on $30,000 a year. "I'm not a member of a country club," he says. "I play at golf courses where the greens fees average about $20. And I've found that travel for a retiree is a lot cheaper than travel for working people. You have the flexibility to fly at off-peak hours and the time to drive to places you had to fly to when you were limited to two or three weeks of vacation."
Tap Your Retirement Accounts Sooner
You can take penalty-free withdrawals before you turn 59-1/2 from your Individual Retirement Accounts (including Roth IRAs) and IRA rollover accounts from a 401(k) or other pension. Section 72(t) of the Internal Revenue Code allows you to start withdrawing from your IRAs regardless of your employment status or age, as long as you "annuitize" your account, that is, take out equal withdrawals every year that are calculated using your life expectancy, says Ed Slott, a Rockville Centre, New York, IRA expert and publisher of the newsletter "Ed Slott's IRA Advisor."
You don't have to keep withdrawing these payments forever; they only have to last five years or until you reach 59-1/2, whichever is longer. And these withdrawals can tide you over until you start receiving Social Security benefits.
This isn't small change we're talking about, either. Pioneer Investments, a Boston mutual fund company, estimates that a 55-year-old man with a $250,000 rollover IRA, for example, could withdraw $29,722 a year.
Play Now, Work Later
The hardest stretches of time for many early retirees are the years before they turn 62, when Social Security kicks in, and before 65, when Medicare steps up to take care of healthcare costs. Until then, retirees need to have enough money to support themselves and pay for health insurance.
One strategy was made possible by Congress last year when it abolished the earnings test that limited how much money Social Security recipients between the ages of 65 and 70 could make without jeopardizing their benefits.
What's the new rule got to do with early retirement? Financial planner Rosenberg says some of his clients see it as an opportunity to "retire" at 55 or 60. They can use the time until they are 65 to do what they want, while drawing on their retirement savings to pay for health insurance and other expenses.
Then, at 65, they plan to start working again, collect full Social Security benefits, and rebuild their retirement savings. As Rosenberg observes, "I have a number of clients who have gone back to work part-time simply because they got bored." Maybe it isn't your father's retirement. But it's not 9 to 5, 50 weeks a year, either.
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