Retirement readiness balances age, financial stability, and individual timing. Determining the precise moment to leave a career is unique to each person, involving a series of financial and personal milestones. The decision requires navigating government-mandated ages, establishing a sufficient financial foundation, and planning the logistical and psychological transition away from work.
Understanding Key Retirement Age Milestones
The federal government establishes several ages that govern access to retirement benefits. Age 62 is the Early Retirement Age (ERA), the first point an individual can begin receiving Social Security benefits. Claiming benefits at this age results in a permanently reduced monthly payment, often up to 30% for those born in 1960 or later, compared to waiting for the Full Retirement Age.
Full Retirement Age (FRA) is the age when a worker receives 100% of the calculated Social Security benefit. This age varies by birth year, increasing from age 66 (for those born 1943–1954) to age 67 (for those born 1960 or later). Waiting until age 70 results in the maximum monthly payment, earned through delayed retirement credits. Medicare eligibility begins at age 65 for most individuals, providing access to federal health insurance.
Calculating Your Retirement Target Number
The primary financial metric for retirement is the “Retirement Target Number,” determined by estimating annual expenses and calculating the necessary portfolio size. A common methodology is the 4% Rule, which suggests a retiree can safely withdraw 4% of their initial portfolio balance in the first year, with subsequent withdrawals adjusted for inflation.
The inverse of the 4% rule is the 25x rule, requiring accumulation of 25 times the estimated annual expenses. For example, if a retiree needs $60,000 per year, the target number is $1.5 million. Estimating annual expenses involves examining current spending, adjusting downward for work-related costs, and adjusting upward for new costs like travel or increased healthcare premiums. Accounting for inflation is necessary, but the 4% rule inherently accounts for this by permitting annual adjustments to the withdrawal amount.
Inventorying Your Retirement Income Sources
Tax-Advantaged Accounts
Retirement funding is drawn from various income sources, each with distinct tax characteristics. Traditional 401(k)s and IRAs are funded with pre-tax dollars, offering an upfront tax deduction, but withdrawals are taxed as ordinary income. Roth accounts are funded with after-tax dollars, allowing contributions and earnings to grow tax-free, and qualified withdrawals are not taxed. Taxable brokerage accounts offer flexibility with no contribution limits, and investment gains are taxed at lower long-term capital gains rates.
Guaranteed Income and RMDs
Guaranteed income sources, such as pensions and annuities, provide predictable monthly payments. Pensions are taxed as ordinary income upon receipt. The timing of withdrawals from tax-deferred accounts is affected by Required Minimum Distributions (RMDs), which are mandatory annual withdrawals from most traditional retirement accounts. The SECURE 2.0 Act raised the age for RMDs to 73, increasing to age 75 in 2033. Roth IRAs are exempt from RMDs during the original owner’s lifetime, offering tax-planning flexibility.
Navigating Health Insurance and Medicare Eligibility
Health insurance is a primary concern for those retiring before age 65, as a gap in coverage can lead to catastrophic medical costs. The first major transition is maintaining coverage until Medicare eligibility at age 65.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows a former employee to continue their previous employer’s health plan for up to 18 months. This option is expensive because the retiree must pay the entire premium, including the employer’s subsidized portion.
The Affordable Care Act (ACA) Marketplace offers comprehensive coverage regardless of pre-existing conditions. Losing job-based coverage qualifies an individual for a Special Enrollment Period. Eligibility for premium tax credits is based on household Modified Adjusted Gross Income (MAGI). Early retirees can strategically manage MAGI by drawing from tax-free sources like Roth accounts, potentially qualifying for substantial subsidies that make ACA coverage more affordable than COBRA.
Planning the Logistics of Your Last Work Day
Leaving a job involves practical logistical steps for a smooth professional and financial exit. Determining the appropriate notice period is the first step. While two weeks is standard for a resignation, senior or specialized roles may require three to six months’ notice to allow for transition and replacement. The announcement should be delivered verbally to the direct supervisor, followed by a formal written letter stating the retirement date for Human Resources records.
The handling of accrued Paid Time Off (PTO) is a significant financial detail. Whether an employer must pay out unused PTO depends on state law and company policy, so retirees must confirm their specific rights. Cashing out a large lump sum of PTO may push the retiree into a higher tax bracket, requiring a strategic decision to either use the time off or accept the tax implications of the payout. A smooth transition also requires diligently documenting ongoing projects and training replacements.
Strategies for Early Retirement
Accessing Funds Before Age 59½
Retiring before age 59½ requires specialized strategies to access retirement funds without incurring the 10% early withdrawal penalty. The Rule of 55 allows employees who leave their job in the year they turn 55 or later to take penalty-free distributions from that specific employer’s 401(k) or 403(b) plan.
Another strategy is Substantially Equal Periodic Payments (SEPP), or the 72(t) rule, which allows penalty-free withdrawals from any IRA or employer plan, regardless of age. SEPP involves taking fixed, calculated payments based on an IRS-approved method for a minimum of five years or until age 59½, whichever is longer. The payment schedule must be strictly maintained to avoid retroactive penalties.