Divide the amount of equity built up in your 401k by the number of years remaining in your life expectancy. For example, if you are 50 years old and have $250,000 in your 401k, your life expectancy will have approximately 25 years remaining, for a penalty-free withdrawal of $10,000 per annum.
Visit your bank or financial advisor to discuss setting up an annuity plan that would see you withdraw the required amount of money each year.
Continue to receive your annuity without adjusting the amount you are paid each year, unless it is absolutely necessary. If your payments drop below your established threshold, the Internal Revenue Service will come looking for the 10 percent fee you're trying to avoid.
Retire on your 401k early by waiting until you're as close to the age of 59 1/2 as possible. Not only will that increase the amount of your annuity, it will also make it easier for you to adjust the amount of the annual payment downward with no penalty. IRS regulations state you will face the 10 percent penalty if you adjust the amount of the annual payment within the first 5 years of your plan, but you are exempt from this technicality after the age of 59 1/2.
Factor marriage into the equation. If a married couple decides to withdraw annual payments together and one spouse passes away, the rules change. If the deceased was aged 59 1/2 or younger, or if the payments had been taken for at least 5 years, the surviving member of the couple is entitled to readjust the payments with no penalty.