Thinking about retiring early? The idea can be tempting. But before making any decisions, you should carefully consider your financial situation.
Taking early retirement can be a big step, especially regarding finances. But with the right savings and knowledge, you can make that dream come true!
What is an Early Retirement?
As part of the Teacher Retirement System and Social Security, you’ll be entitled to full pension benefits when you retire at or after your Normal Pension Age (NPA). This equals the state pension age (66 or 67) for most people. You can delay your retirement up to the age of 75.
If you wish to retire early, you can start drawing your pension from age 55, but you’ll need to ensure you can afford a longer retirement.
If you take your pension before the Normal Pension Age (NPA), you’ll face an early retirement penalty. As a trade-off for retiring early, you’ll receive fewer benefits than if you were to retire at your NPA.
You need your employer’s permission to retire early. If they don’t agree to an early retirement, their decision will only remain valid for six months.
After these six months, you’ll be entitled to an early retirement. Your benefits will be paid the following day if you leave pensionable employment.
What if You want to Make a Gradual move to Retirement?
If you want to slow down your schedule and retire at your own pace, you can opt for a phased retirement. You’ll have to move to a less senior position or reduce your teaching hours. This will relieve some of your workload and ease you into retirement.
As you’ll still be working, you’ll continue contributing to the Teacher Retirement System (TRS) and building your benefits for retirement. You can take up to 75% of your pension while working if your employer’s permission and your new salary is 20% less than your previous twelve months’ average earnings.
If you take your benefits before your NPA, they’ll be reduced, like if you retire early. But you won’t face any reductions if you take your benefits after your NPA.
How will Your Benefits be Calculated and Reduced?
When you retire early, you’ll get the Actuarially Adjusted Benefits. This means your benefits will be reduced to account for the fact that you’re not contributing up to the normal retirement age. The size of the reduction will depend on how early you start taking your pension.
These factors also have a hand in the game:
- How long you’ve been in service when you choose to retire?
- The age you retire (how close you were to your NPA).
- Whether you’re in final salary to career average arrangements, including whether you joined the scheme before or after 2007.
- If you purchase a ‘buy-out election,.’
As a career average member, you can pay contributions to buy out the standard reduction of 3% a year for up to three years. This is known as a ‘buy-out election.’ You only have this option for the first six months of taking your benefits, so you’ll need to decide quickly.
It’s difficult to know how much income and lump sum (if you’re entitled to or have purchased one) you’ll receive. A qualified Financial Specialist can advise you on your specific situation and conditions.
Some calculators estimate how much you’ll receive when you retire but don’t always account for optional benefits, such as additional pensions or voluntary contributions.
How Will Your Benefits be Paid When You Retire Early?
If you’ve accrued benefits in both your career average and final salary, you’ll have to take all your benefits simultaneously.
Your employment contract must end to receive your benefits. If you decide to return to teaching before you’re due to be paid, your application for early retirement will be voided.
If you’re considering early retirement, you must submit your application two to six months before your chosen retirement date. This is because your salary details and employment could change during this time.
Social Security and other Retirement Benefits at The age of 55
If you retire at age 55, you probably won’t be eligible to receive Social Security retirement benefits for several years or be able to withdraw money from your retirement accounts without paying a 10% early withdrawal penalty. Additionally, Medicare won’t kick in for another 10 years for most people.
It is possible to retire early at age 55. Still, most people are not eligible for Social Security retirement benefits until they’re 62, and typically, people must wait until age 59 ½ to make penalty-free withdrawals from 401(k)s or other retirement accounts.
For most people, the full retirement age means they’re entitled to 100% of their Social Security retirement benefits. This age means 67 in the United States.
People with 401(k)s at work may be able to withdraw money early from those accounts penalty-free if they leave their jobs at age 55 and up. This is often called the “rule of 55.”
Exceptions to 401(k) early withdrawal rules
You’ll likely be subject to a 10% early withdrawal penalty if you take money from your 401(k) before 59 ½. But according to the IRS, these circumstances may allow you to skip the penalty:
- You quit your job in or after the year you turned 55.
- You’re totally and permanently disabled.
- You agree to take “a series of substantially equal periodic payments over your life expectancy.”
- You had tax-deductible medical expenses that exceeded 7.5% of your adjusted gross income.
- You were a reservist called to active duty for at least 180 days after Sept. 11, 2001.
- You had or adopted a child (for withdrawals up to $5,000).
- You quit your federal or state government public safety employee job when or after you turned 50.
Exceptions to IRA early withdrawal rules
Generally, money taken out of an IRA before age 59 ½ is subject to a 10% early withdrawal penalty. Unless one of these exceptions applies:
- You become totally and permanently disabled.
- You have qualified higher education expenses.
- You agree to take “a series of substantially equal periodic payments over your life expectancy.”
- You are a first-time home buyer (for withdrawals up to $10,000).
- You had tax-deductible medical expenses that exceeded 7.5% of your adjusted gross income.
- You were a reservist called to active duty.
Pension plans
Depending on where you’ve worked, you may be able to take withdrawals from a pension on or before you turn 55. Check with your employer to see if you’re eligible. Teachers in California, for example, might be able to retire at age 55 if they have at least five years of service credit. Members of the U.S. military, meanwhile, typically can retire at any age after 20 years of service.
Review Your Future Plans
Identifying and setting priorities is essential for any retirement plan.
The first step should be to consider your retirement goals and ambitions. Ask yourself important questions such as what you want to do with your time, whether you want to continue working, and your expenses.
Make a game plan!
- Determine what your goals are for early retirement.
- Create a mock retirement budget.
- Evaluate your current financial situation.
- Invest in a bridge account.
- Invest in real estate.
- Get serious about lifestyle changes.
- Play it smart when you retire early.
It´s important to know that retirement costs will likely change as you age. For example, you might need to pay for the cost of care in later life.
Determine Your Income
The next stage is to identify your income sources and whether they will be enough to cover your retirement ambitions.
Sources of income could include a pension in the Teachers’ Pension Scheme (TPS), a personal pension, the State Pension, and your savings and investments such as shares and property.
You must consider how to access this money and whether it is easy and quick. For example, there may be rules around your pensions, savings, and investments that could affect when you can access your pot and, consequently, what you can afford to do, as well as tax implications. Careful planning and consideration are essential to getting the most out of your retirement income.
Disclosure: This information is for educational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.
About Author
Bill Wallace blends his academic background in Literature with his ventures in International Business and finance. His professional journey took him across Europe, especially in Spain, where his passion for writing evolved. Since then, armed with his literary finesse and investment acumen, he has been crafting financial content for teachers worldwide. More about me.
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