Five x Five

Roughly speaking, about one-half of the people I talk to are content to work into and through their 60s, and about one-half would like to quit working (at least full-time) tomorrow. I’m speaking to the latter group today.

There is so much to be said — for and against — early retirement; I won’t be rehashing those arguments today. My starting point is that you have decided to plan for an early exit, and so you need to know about the “Rule of 55.”

It’s quite straightforward. If you leave your employer during the year that you turn 55 years old (or older), you have penalty-free access to your savings in that employer’s retirement plan (401(k), 403(b), TSP). It’s not locked up until you are 59 ½ years old. And notice how I wrote that sentence: You don’t need to have actually had your 55th birthday party.

Knowing this leads to several important planning decisions that you can make now, well before your 50s.

• Do you have an old 401(k) with an employer that you left ages ago? (Or perhaps several?) Yes, common wisdom is to roll it into an IRA. But if you do that, you lose access to the ability to invoke the special Rule of 55. You cannot take penalty-free withdrawals from an IRA at 55. Nor can you take penalty-free withdrawals from that old employer’s plan; this rule only applies to the plan that is current in the year you turn 55.

However, if you roll that old 401(k) into the retirement plan at your current employer — that is, the employer that you intend to be with when you reach your 55th year — then those “old funds” become part of the current plan…and so part of the funds that you can withdraw early.

• Perhaps you have a traditional IRA account already, likely created by a rollover from a previous employer. Many, if not most, employers will allow you to roll that into your current workplace plan. Again, this increases the balance that you have available to you for your early retirement dream.

• But don’t forget “like to like” when thinking about rollovers. If that IRA is a Roth IRA, then you can’t roll it into a Roth 401(k) (or similar Roth workplace plan). Ask the IRS why that is. (There are reasons…)

• Does this change your thoughts about using a Roth IRA for retirement savings? Even if you believe that post-tax Roth contributions are the more optimal choice for you tax-wise, if you are planning for a mid-50s retirement, a better bet is to max out your workplace plan (even if only pre-tax traditional contributions are available) before adding a Roth IRA.

As you celebrate your 50th birthday and early retirement is on the nearby horizon, there are a couple of new tasks to add to your To Do list:

• Take advantage of the ability to make catch-up contributions to your 401(k). For 2026, that’s an extra $8000.

• Revisit your asset allocation. Are you using a target date fund for your retirement savings, but you chose the target date based on the idea that you would not begin withdrawals until your mid-60s? (Or it was chosen for you by default?) Now is the time to “back up” your target date to more closely reflect the year that you actually intend to retire. You are a mere five years away from taking withdrawals; you don’t have the same investment risk capacity as your working-until-she-drops colleague.

What makes the Rule of 55 preferable to the other technique to gain access to retirement funds early without penalty (IRS Rule 72t) is that it is flexible. Once you separate from that “last’ employer in the year you turn 55, you can access your 401(k) how and when you want. Unlike distributions under Rule 72t, there are no fiddly rules about how much you must withdraw and when. With the Rule of 55, you can take distributions for a couple of years and then decide that retirement is a bore, return to work, and stop or reduce your withdrawals.

Finally, I would be remiss if I did not conclude this with a reminder that the most key ingredient to planning for an early retirement is to save, save, save. It’s not just that your retirement nest egg needs to last years longer; it’s that the reason most give for seeking to retire early is to spend, spend, spend on travel and hobbies. Those early retirement years can be pretty expensive.

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