Making Better Financial Decisions

Want To Retire Early? 3 Penalties And How To Overcome Them

by Glen Hawkins

Early retirement is something that many Americans dream of being able to accomplish. If your goal is to turn this dream into a reality in your own future, though, you must face some of the unique financial penalties that come with the territory. What are some of these possible penalties and how can you beat them? Here's what you need to know.

1. Early Withdrawal

If you want to retire before age 59 1/2, any withdrawals from 401(k) plans will be subject to a 10% penalty. No one wants to lose 1/10 of their retirement savings, so how can you work around this?

First, know that you can generally withdraw from your current employer's 401(k) plan if you leave as early as 55 years old. So plan to use this for at least five years. Alternatively, you can also put money into a Roth IRA which allows tax- and penalty-free withdrawals in many circumstances. 

2. Health Insurance

One of the biggest challenges for early retirees is how to pay for health insurance coverage before they qualify for Medicare at 65. This is a tough one, so you may need to be creative. When you leave your current job, you will likely have access to COBRA insurance coverage. While you no longer receive the company's subsidy, you do benefit from their negotiated rate. You may also be able to negotiate payment in your severance package. 

Other ways to address health insurance needs is to plan your income so that you qualify for the Premium Tax Credit and can buy insurance on your state's marketplace. Many early retirees set up a side gig or take on a part-time job to pay for insurance. And if your spouse isn't retiring at the same time, you might get coverage through them. 

3. Reduced Social Security

Most Americans know that they can file for Social Security as early as 62, but it will be at a lower rate. However, another Social Security penalty is that your rate is determined over your lifetime of earnings history. Therefore, if you retire early, your overall earnings will be lower — and so will your lifetime benefits.

There isn't an easy workaround for this, so your best bet is to factor in less Social Security funds in your retirement plan. Instead, put more into your IRAs, 401(k) plans, and other vehicles. 

Where to Get Help

Do you need assistance overcoming these or other penalties for early retirement? If so, start by meeting with a financial planning company, such as Compass Financial Group, in your state that specializes in retirement income planning. No matter how you solve these issues, the result will be a stronger, more financially stable future.