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Retiring early? 4 withdrawal strategies to consider

Allworth Co-CEO Scott Hanson outlines some of the ways to access your money if you're retiring early.


Sometimes, life throws you a curve. Other times, it throws you a perfect pitch right down the middle and you smack it out of the park.

And then there’s early retirement. Sometimes it’s planned and sometimes it’s not.

If, for any reason, you retire early, how would that change your savings and retirement account distribution strategy, and how should you respond?

Remember, everyone’s situation is unique, and everyone needs a personalized plan.

Before I get started, immediately speak with your fiduciary advisor if there are any changes to the date you intend to retire. He or she will work with you to construct a plan that helps to protect you from making costly and avoidable financial mistakes. Also remember, that saving money for retirement is only half the battle. The other half involves taking smart, well-timed, money-saving distributions from your accounts.

Here are 4 early retirement withdrawal strategies for you to consider.

The 4 percent rule

If you research retirement withdrawal strategies, you’ll come across what’s known as the 4 percent rule.

It’s popular in-part because it’s easy to explain.

What’s bad about the rule, and why I’m not a huge fan, is that it’s much too simple of an approach for people who have complex financial situations.

This rule follows the thinking that a 4 percent annual withdrawal rate in the first year of retirement (followed by inflation adjusted withdrawals going forward) is probably safe (read: won’t deplete your savings) because there’s a reasonable expectation of earning a 4 percent annual return on a properly diversified, moderate-risk portfolio.

Which brings us to…   

Use-only withdrawal income

Whether you’re forced to retire early, or you just wake up one morning and say, “That’s enough of that,” one definition of financial independence is when you’ve accrued enough savings that you not only don’t have to work (unless you want to), but you can live entirely off the income derived from your investments (and not touch the principal).

This is ideal, and it should be your goal, but why?

For great savers who aren’t born into immense wealth, there typically is no magic number that guarantees you’ll have enough money to live with no financial worries for the rest of your life.

Besides the inevitable financial emergencies, there’s a cycle, a trap, even, that a lot of people retire and fall into. They derive some income from their investments, but not enough to live on, so they are forced to tap their savings principal, which means each year that principal gets smaller and smaller, which means that each subsequent year, the interest income steadily decreases.

Which in-turn forces you to use more and more of your principal each year to survive.


Saving well enough, and creating a personalized plan, so that you can live entirely off the income from your investments helps protect you from running out of money.

Non-qualified funds

Most good savers have money in more than one savings vehicle. That’s not to say that if all your savings is in a 401(k), that you’ve done a terrible thing. It’s just, when it comes to flexibility, that may not be optimum.

That’s because the unique tax treatments of defined contribution plans mean that if you are forced to retire earlier than age 59 1/2, using those monies can run you afoul of the IRS in terms of tax treatments and nasty early withdrawal penalties. (Though, I should note that the 'Rule of 55' and 72(t) distributions can be implemented earlier than 59 1/2, helping you to avoid the aforementioned penalties. But you need to follow strict rules with both of these strategies, so be sure to consult with your advisor.)  

On the other hand, money that you liquidate from brokerage accounts or appreciated investments (also known as non-qualified funds) is usually taxed at a lower rate than the money taken from a 401(k), which is taxed as ordinary income. Plus you can take money out of these types of accounts at any time, regardless of your age, so you're typically going to want to tap these first.

You need to work with an advisor to strike a balance and make the best decision for you.

(Side note, the above is not to infer that you automatically want to leave your 401(k) untouched until you are forced to begin taking minimum distributions at age 72, because there are several financially advantageous scenarios where you might want to begin using that money earlier.)

A Roth IRA

Under 55? If you’ve owned it for at least 5 years, consider using the funds in a Roth IRA. Because while there are some restrictions about when you can take a withdrawal, generally, money goes into a Roth IRA after tax, so your withdrawals come out tax free. (The money doesn’t even have to be recorded as gross income when you file your tax return.) 

Just remember, you can withdrawal your contributions to a Roth IRA anytime before age 59½, but you can’t touch the earnings until later. And you also must have opened the Roth IRA at least five years before you take a withdrawal.

Other guidelines apply.


Whether from ill health, or from the desire to begin a new life, after 30-years of advising, my experience has clearly shown me that virtually all retirements pose emotional challenges.

These challenges are only heightened if there is anxiety about money.

While mistakes are costly, you can help avoid them by having a fireproof plan in place that prepares you as early as possible for virtually any outcome.