The good news is, you can retire any time you feel like it: There are no hard-and-fast rules about early retirement. The bad news is, although you can retire when you're 38, you may not have a retirement plan that will support you through 45 or 50 years of retirement. Timing is a key part of retirement planning, and many factors weigh on your decision, including pension accessibility, the size of your nest egg and the amount of money you'll need to sustain your lifestyle in retirement.
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Social Security Pensions
Regardless of when you stop working, you won't be eligible to receive your pension from the Social Security Administration until you reach your 60s. Although full retirement age varies, according to the year in which you were born, anyone born after 1960 can't retire with full benefits until their 67th birthday. You may opt to begin receiving your pension as early as age 62, although your pension will be reduced by about 30 percent. If you hold out and take a semi-early retirement at age 65, you'll receive about 86 percent of your full pension amount.
IRAs and 401ks
Many retirement contributions receive preferred, pretax status when you make them under the assumption that you'll wait until you retire to access them. Although funds placed in a designated qualifying retirement account may be accessed at any time in your life, if you take a distribution from a Traditional IRA or a 401(k) plan before you turn 59 1/2, you'll more than likely face an additional 10 percent early distribution tax, in addition to income taxes on all funds prematurely withdrawn. Additionally, you must begin receiving distributions from these accounts by the time you turn 70 1/2, or face excise taxes. Certain exemptions – education expenses, first-home purchases and petitioned hardships – allow you to draw money early from an IRA without penalty, but early withdrawals from a 401(k) will likely cost you even if you meet the exemption standards.
Calculating Retirement Needs
If your non-retirement financial holdings are large enough to support your lifestyle without a source of earned income, you may retire at any age you choose. Although many retirement planners urge their clients to aim to receive about 80 percent of their yearly income from retirement income, your choices depend upon your living situation and financial needs. Estimate the percent of your current income you'd need to live at your comfort level, and use this as the basis for your yearly retirement income. Multiply this figure by the years left in your estimated lifespan to calculate basic retirement savings needs.
Early Retirement and Social Security
If you retire at full retirement age, you can count on receiving about 40 percent of your annual wage in benefits. If you take benefits at age 62, that figure drops to about 28 percent of your wages. The Social Security Administration bases your pension on your lifetime contributions, so if you stop working at age 45, your pension will be drastically reduced because of the fewer number of years you made contributions.