There are a couple ways to enjoy an early retirement—as long as you’re confident your financial situation allows for it! Take a look at some different ways to access your retirement money early.

2 ways to use retirement money early

There are a couple ways to enjoy an early retirement—as long as you’re confident your financial situation allows for it! Take a look at some different ways to access your retirement money early.
6 minute read
September 27, 2021
Planning for retirement
Early retirement
Early withdrawals

As you approach retirement, you may find that you’re in a comfy spot and want to retire early. But how can you enjoy an early retirement before you can access 401(k)s and IRAs penalty-free at 59½? The best way is to have savings invested in a taxable account. If you don’t, there are other ways to enjoy an early retirement—as long as you’re confident your financial situation allows for it! Take a look at some different ways to access your retirement money early without triggering a 10% early withdrawal penalty. We’ll cover

  • SEPPs 
  • The Rule of 55


Substantially equal periodic payments, or SEPPs, is a withdrawal option starting before age 59½ and lasting either until age 59½ or 5 years, whichever is later. While calculating your withdrawal amount can be a little complicated, be sure to do it correctly to avoid penalties. Let’s break down the 3 decisions you have to make if you choose SEPPs.

Decision 1: Choosing how to calculate the amount you take

First, you’ll need to pick a formula to calculate your withdrawal. Here are 3 methods to try:

Fixed amortization—usually results in the highest withdrawal amount. Once you determine the amount, it’ll remain the same in future years.

Required minimum distribution—usually results in the lowest withdrawal amount and is the simplest to calculate.

Fixed annuitization—usually results in an amount somewhere in the middle and remains the same every year.

Some of your decisions can be changed in later years! Your withdrawal amounts can change, but only if you pick certain elections at the beginning. That’s why it’s so important to be strategic and think about your long-term needs.

Decision 2: Choosing a method of determining your life expectancy

The decision you make will affect the amount of your SEPPs as well as the strategies that are available to you in the future. You can choose from 1 or more of these tables depending on your beneficiary designations and the calculation method you chose.

The single life expectancy table—usually results in the highest withdrawal amount.

The uniform life table—usually results in the lowest withdrawal amount.

The joint life and last survivor table—usually results in an amount somewhere in the middle unless the beneficiary is more than 10 years younger than the owner, then it becomes the lowest withdrawal amount.

Decision 3: Choosing your interest rate

If you chose the fixed amortization or fixed annuitization formula, you’ll need to choose an interest rate. You can choose whatever rate you want, as long as it doesn’t exceed the greater of 5% or 120% of the mid-term applicable federal rate. Just keep in mind that the higher the interest rate, the higher the withdrawal amount.

For more info on how to accurately calculate SEPPs, these FAQs from the IRS can help.

Remember: If you miss a payment, it’ll affect your current SEPP and retroactively penalize any other SEPPs before 59½, so always be sure to make payments on time.

The Rule of 55

55 may just become your new favorite number. If you’re looking to retire early, this might be a great option. The Rule of 55 is simple: If you leave your employer on or after the year you turn 55, you can begin taking withdrawals from your 401(k) for 403(b) from that employer.

The Rule of 55 is often seen as more flexible, easier-to-implement alternative to SEPPs for those who qualify. Here’s a closer look at what that means:

Because the Rule of 55 applies only to money in your most recent employer plan, consider consolidating all your qualifying assets into that plan before you leave your job.

Look into whether distributing employer stock eligible for net unrealized appreciation would allow you to access the money you need while costing you less in taxes. Once you start withdrawals, you can only do this by the end of that calendar year or you must wait until you meet another qualifying event.

The IRS allows you to take any number of withdrawals in any amount, but your employer might have specific requirements for withdrawal timing.

Do you work in the public sector? You might be able to access your money even earlier—starting at age 50.

You should also consider waiting until the year after you retire to start withdrawals. That way, you won’t have employment income and retirement withdrawals in the same tax year, potentially lowering your income and tax burden.

If you want to work part-time after retiring somewhere besides your last job, you can! Part-time work won’t impact your ability to take advantage of the Rule of 55.

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Distributions from a retirement account before you reach age 59.5 (or distributions from a qualified plan, before you reach age 55 and are separated from service) may be subject to a 10% early withdrawal penalty under section 72(t) of the Internal Revenue Code, in addition to any applicable taxes on the distributions.

Section 72(t) of the Internal Revenue Code provides several exceptions to the 10% penalty on early distributions.

Not all employer-sponsored retirement plans allow substantially equal periodic payments. You should check your plan documents to confirm if these distributions are permitted and the conditions that apply.

Substantially equal periodic payments made less frequently than annually may be subject to a 10% early withdrawal penalty. Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change.  Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal adviser about your individual situation.

While Vanguard Personal Advisor can give you guidance on SEPPs and the Rule of 55 and the considerations that may apply to you, we recommend you work with a tax advisor to understand how these options will affect your tax situation and to calculate your SEPPs if applicable.

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