Early retirement using 401k and/or IRA funds

Rocking chairs in a porch in Canaveral National Seashore - Photo: Still Gravity.
Sweet retirement spot - License our images here.

At age 59 1/2 you can take money from your 401k or IRA without penalties. What about using those savings for early retirement? 

I think is possible. The idea is to cover the gap years to the "official" retirement age when social security will pay monthly income. Explained as simple as possible. 
  • Divide the balance in your 401k or IRA by the years until your legal retirement age - add three more years to cover for stock market fluctuations. 
  • The result is your maximum annual "salary" coming from your retirement funds - remember that you are "hiring yourself" to do what you want, so you will be your own "employer". 
  • Now calculate your monthly expenses and create a budget based on your new "salary". Include healthcare cost, real estate property taxes, and income tax - 401k and Traditional IRA distributions are taxed as ordinary income. 
  • If you decide to retire early... stick to your budget! 
Important points to keep in mind: 
  • This may not work if you have debts and mortgages.  
  • It works better for frugal, organized, and disciplined persons. If you need too many things, better plan on working until you die and don't forget to take all the accumulated stuff with you to your afterlife residence. 
  • Learn about investments and try to preserve the principal of your retirement account as much as possible. 
  • Be ready for changes and expect the unexpected. There are no guarantees - remember something called inflation.   
  • If things go awfully wrong and you own a home, sell the house and downsize to a less expensive area. If this doesn't help, go back to work and enjoy the memories of the good years lived doing what you always wanted to do - positivism is good. 
Let's do a math example with simple numbers. 
  • Imagine that you are 60 and your retirement age is 67. The gap to cover until Social Security is 7 years. Add three more for a safety margin and we get 10 years. 
  • Let's assume that your retirement account has a balance of $300,000. Divide this number by the 10 years you need to cover. 
  • Your potential income per year is $30,000. This means that you got a job doing nothing that pays $14.42 per hour or $2,500 a month. 
  • The big personal question is, can you live with that? If not, forget all and go back to work until retirement age.  
Of course, I'm not a financial planner. Follow these ideas at your own risk. 

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