72t Early Retirement
Every day we get calls, emails and inquiries from individuals across the United States who ask us “Can I retire even though I haven’t reached the magic a of 59 ½?” Early retirement is absolutely doable with a properly structured 72(t) Series of Equal Periodic Payments (SEPP).
Of course, everybody has their own unique circumstance and it is important that whoever you choose to advise you make sure they have the experience, wisdom, knowledge and appropriate licenses to help guide you at this critical time. At a minimum, please make sure they hold a Series 7 and a Series 65 or 66 Securities licenses. This advisor should also be Insurance licensed.
Last week, a gentleman called in and asked for information and advice on his personal situation. He is 53 years old, divorced with one child who is currently in college. He is getting ready to resign from his current employer and wanted to know if can he set up an early retirement plan to generate $3,000 per month from his existing $725,000 retirement account avoiding the 10% early withdrawal penalty tax (since he is under the age of 59 1/2).
The $3,000 per month is what he estimated he needs to pay his fixed expenses. This gentleman plans on changing careers now (wants to be a teacher) which will earn him approximately $40,000 annually, far below what he is currently earning in his computer software career for the past 25+ years. We also discussed his other investments, assets, liabilities, savings, etc. In this case, 72(t) for early retirement income is an ideal strategy to generate the income he will need to cover most of his fixed bills and expenses.
A properly structured and managed 72(t) plan utilizing the most appropriate of the (3) methods that the IRS allows will generate approximately $2,750/month which will cover 90% of his fixed expenses while he transitions his career to fulfill his lifelong passion to teach.
The Internal Revenue Code 72(t) SEPP requires him to take income for a minimum of 5 years or until the age of 59 ½ whichever is longer, so he will need to commit to 6 ½ years of payments (age 53 to 59 ½) to satisfy the IRS 72(t) rules and requirements. We will set up and manage this plan to pay him monthly income.
Also, we were able to “mirror” his current 401(k) choices from an asset allocation standpoint in addition to adding some guarantees and features that were not available in his current 401(k) plan. This gentleman has been pleased with his 401(k) plan due to the performance over the past several years and he was happy to hear that we were able to establish an IRA that offered him more Investment options than his current 401(k) in addition to other valuable features and benefits that were important to him and his family at this important time in his life.
Early Retirement utilizing a properly structured 72(t) is an excellent option to create penalty-free income.
Again, please make sure you get competent advice from a wealth management firm that specializes in this area of financial planning.