High Income Early Retirement Example

Theoretical Example Only: 

Married couple Steven and Sally are ready for retirement with plenty of pre-tax retirement funds put away. However Steven and Sally never saved any post tax savings. Both Steven and Sally are high earners, and they are ready to move on from their demanding corporate world. Steven is 55, Sally in 48. 


Since both Steven and Sally maintained high end sales positions, they fall into the category identified by Sam from Financial Samurai as Above Average High Income Earners. See Sam's table and article reference below. If you subtract the post savings, 


Balances:

Steven has approximately 1.4 million in retirement fund savings, and Sally has approximately 1 million. So with a total of 2.4 million saved, they should be in good shape if they only pull no more than 4% of their retirement savings. In theory, they will not run out of money. 


The question remains, how do they tap into retirement early without paying extra fees?


See Sam's FinancialSamurai Link and table below for reference. This table represents a best case saving's scenario. High income earners that Sam refers to as above average.


Link: 

https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/

Retirement Options

Conventional thinking:

Conventional wisdom in the retirement planning world is that Steven and Sally should wait until they turn 59 and 1/2 years old before even thinking about taking withdrawals from retirement funds of any kind. 


The reason this wisdom is commonly understood is that the IRS indicates that starting any distributions out of your retirement account before then will create additional penalties for withdrawing your money early. Yes, that seems easy enough to understand. Wait until you are 59 and 1/2 years old.  


See this IRS rule here:  https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions


There is another Required Minimum Distribution age of 70 and 1/2 years, that's when the IRS will also start applying hefty penalties if you don't take out the minimum distributions. 


See that rule here:  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals


The unconventional but necessary solution:


(A) 55 year old rule: 

There is a IRS rule called the 55 year old rule that Steven can implement this year. The 55 year old rule states that if you separate from service (meaning quit your job, get fired, etc) at age 55 you can begin some of the 401k withdrawals from your company sponsored 401k. Here is the IRS definition for separation of service:


"the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)**


Steven did quit his job after turning 55 years old, so he is eligible to begin withdraw some of his money from his employee sponsored 401k.


(B) Disability:

Sally had been struggling some time with a medical condition that had limited her overall quality of life. Her condition is listed as an acceptable/approved condition identified by the social security administration. 


So at 50 years old, after the appropriate approval process that has identified her condition as a "total and permanent" disability, Sally can begin receiving social security. Additionally her company sponsored retirement and personal SEP and older IRA's will also be available for distributions without penalties or fees. 


(C)  Property Arbitrage 

Fortunately Steven and Sally invested in several high rent properties early on in their career, so the rental income will add to the income created from the other income sources. Steven and Sally can also consider downsizing, reducing their tax liability and simplifying their life by renting out their primary residence and moving into a smaller, less expensive home. Again, all this is theoretically possible because they opted to purchase property instead of building up post tax savings. 


Summary: 

Obviously, no one wants to be permanently disabled, and of course not everyone is a above average high income earner like the the ones listed in the financial samurai article. However, there are examples of people retiring early without paying a 10% early withdrawal fee to the IRS. Make sure to fully read and understand all of your options before giving notice your work so that your retirement brings you more fun than pain.  



Note that I am not a financial or legal professional, nor am I licensed to sell securities, or any other financial instruments. Given this statement, I strongly recommend that you consider this blog as entertainment value. Although, I sincerely hope that I can motivate you to learn to build your own financial knowledge and wealth.