Could You Be Spending Your Nest Egg Too Soon?

You’re eager to start retirement – but are you spending your nest egg too soon? Taking Social Security or withdrawing retirement savings early can cause long-term financial challenges, and you may come to regret your decisions. However, if you’re ready to retire, there are other ways to secure retirement income when you need it.

What Is the Best Age to Retire?

The standard retirement age is widely considered to be 65. This is also when you become eligible for Medicare insurance based on your age. However, 65 is not a particularly notable year for Social Security benefits, which you can claim earlier or later, and opinions on the best retirement age vary.

Many people want to retire early – often as early as possible.

According to Pew Research Center, Americans say the best age to retire is 61.8 on average. Interestingly, across most countries, the ideal age to retire is younger than the age at which people become eligible for retirement benefits. This holds true in the U.S., where the earliest you can claim Social Security retirement benefits is age 62, and you don’t reach full retirement age until age 66 or 67, depending on when you were born.

Some people endeavor to save money so they can retire early without depending on benefits. The FIRE movement – which stands for Financial Independence, Retire Early – is built around this goal.

Unfortunately, even with personal savings, an early retirement can come with a dark side. Without the right retirement strategies in place, you could run out of money. Even if you don’t run out of money, the fear of doing so could prevent you from enjoying your retirement the way you should.

To offset this risk, people who want to retire early need to implement smart financial strategies to ensure that their money lasts. Simply drawing on your retirement funds and claiming your retirement benefits early may not work in the long run, even if you have a generous retirement nest egg. Other strategies, such as annuities, provide alternatives.

Cashing out 401k Early: Penalty Risks

Retirement accounts like 401(k) plans provide certain tax advantages that help people save for their golden years. However, these benefits come with rules, and if you withdraw early, you could end up paying the price.

The IRS says most retirement plan distributions are subject to income tax, and there may also be an additional 10% tax on early withdrawals made before you reach age 59½. There are some exceptions, such as if the participant or owner experienced total and permanent disability. However, if you don’t qualify for an exception, you can expect to pay Uncle Sam an extra 10% on your early withdrawals. If you’re trying to make your retirement nest egg last as long as possible, this penalty could be detrimental to your long-term strategy.

How to Avoid Early Withdrawal Penalty

The easiest way to avoid the early withdrawal penalty is to avoid making withdrawals before you reach age 59½ unless you’ve confirmed that you qualify for an exception.

This sounds simple enough, but the catch is that if you need an income, you’ll have to find it elsewhere. You may be able to keep working until you’ve reached age 59½, but if you’re forced into retirement, this may not be an option. Some people don’t choose to retire early. They have to stop working because of health problems, or because they’ve been laid off and can’t find another job, or because they have to provide unpaid care for a loved one. If you’re in one of these situations, you’ll need another source of income, such as an annuity that provides retirement income.

Claiming Social Security Retirement Benefits Early

You can claim Social Security Retirement Benefits at age 62, but if you do so, the amount you receive will be reduced for the rest of your retirement. The Social Security Administration says that you’ll only receive 70.0% of your full benefit if you are the wage earner and you start receiving benefits at age 62.

To receive your full retirement benefits, you need to wait until your full retirement age. If you were born in 1960 or later, you reach your full retirement age when you turn 67. The full retirement age will be a little earlier for people who were born before 1960.

If you wait until you turn 70, you’ll receive even more thanks to the delayed retirement credits you’ll receive.

For someone looking forward to a long retirement, claiming Social Security early can result in significantly lower benefits over the years. While it can be tempting to claim as early as possible, it may make more sense to rely on other sources of income until you reach full retirement age or age 70.

Building a Bridge with Annuities

Let’s say you’re ready to retire at age 55. You have a 401(k) plan as well as other savings, and you think you’ll have enough money to cover your retirement, but you want to make sure you don’t run out. You don’t want to pay an early withdrawal fee on your 401(k) savings, and you want to wait as long as possible to claim Social Security. Your plan is to rely on your other savings while you wait to be eligible for penalty-free retirement account withdrawals and maximum Social Security benefits.

This is sometimes known as a bridge strategy. Basically, you rely on your personal savings during the early years of your retirement. Then you switch to retirement benefits once your reach full retirement age. This strategy can work if you’re retiring early. It can also work if you’re retiring at age 65 but don’t want to claim Social Security benefits yet.

The trick is to ensure that your personal savings stretch as long as you need them to. One way to do this is to buy an annuity.

You can buy an annuity with a one-time, lump-sum payment or with a series of payments. Then the annuity will provide you with a source of income, either immediately or starting at a later date. There are many different types of annuities, and they have different rules and risks, so it’s important to choose one that meets your needs and risk appetite. Also pay attention to fees and commissions, which can decrease your return from your annuity.

The Forever Fund

The Canvas Forever Fund is an annuity designed to provide guaranteed retirement income. You can choose to have your annuity pay lifetime income if you need it to last your entire retirement. If you just need the annuity to cover you until you can take 401(k) withdrawals or claim Social Security benefits, you can choose to collect guaranteed payments for a set period of time instead. When you choose the Forever Fund for your retirement, you’ll enjoy a guaranteed income stream with zero commissions, account charges or fees.

Learn more about the Forever Fund.