Is $1 Million Enough To Retire on at 55?

As I often do, I found myself standing in the front yard talking to a friend of mine while I was watering the lawn.  He’s 51 years old and has been working at the same company for 20+ years.  A few weeks ago, he told me that he’s going to have to start driving a lot farther to work each day due to the company moving his group to another location.  The change is going to add 45 minutes to an hour to his commute each way.  Any way you slice it, it’s a brutal blow.

He told me that he’s not happy about having to drive farther but he’s finding a ray of hope in the situation because he may be able to retire at age 55.  That would mean he’d have to tolerate the brutal commute for 4 years, unless he was able to find another job somewhere else in the company.  As we talked, we started to discuss more specifics.  He’ll get a decent pension, but he would be foolish to start taking the reduced pension at 55 so he’s better off waiting until 59 or 60 so that he can get a larger amount.  That would leave him with no income for roughly 4 years, until he started drawing on his pension.  The good news is that he and his wife have been good savers and have amassed roughly $1 million dollars in their retirement accounts.  Yes, that money is kind of tied up until he hits age 59.5 too, but he could consider taking a regular distribution to start drawing on his 401K early without a penalty.  Here are the rules from the IRS website:

Tax on early distributions. If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income.

Exceptions. The 10% tax will not apply if distributions before age 59 ½ are made in any of the following circumstances:

• Made to a beneficiary (or to the estate of the participant) on or after the death of the participant,

• Made because the participant has a qualifying disability,

• Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.),

• Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,

• Made to an alternate payee under a qualified domestic relations order (QDRO),

• Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions),

• Timely made to reduce excess contributions,

• Timely made to reduce excess employee or matching employer contributions,

• Timely made to reduce excess elective deferrals, or

• Made because of an IRS levy on the plan.

• Made on account of certain disasters for which IRS relief has been granted.

In looking at the rules, he could opt to take regular distributions from age 55 to his “technical retirement” at 59.5 to avoid the 10% early withdrawal penalty.  Assuming that would work for him, does he have enough money to be able to do this?  If he has $1M total and used a 4% withdrawal rate, he could expect to generate $40,000 before taxes.  Depending on his overall financial situation, he may not have to pay too much in the way of taxes, although let’s just assume 20% would go toward taxes.  That would leave him with $32,000 in annual income from his nest egg which would equate to roughly $2666 a month.  If he was debt free and lived a modest lifestyle, he might be able to swing it.  Of course the big unknown is health care.  At age 55 he wouldn’t qualify for medicare.  If his company gives him retiree health care (which I believe they do), he’d be okay.  Otherwise, health care might be a deal breaker and force him to stay in the workforce longer.

That just seems sad.  A guy manages to amass a $1M nest egg over his working life and it still might not be enough to retire at 55.  If anything, it makes me want to save even more than we are already saving because I REALLY want to stop working by age 55.  If I can’t stop working fully, I may just switch gears and find a part time job to supplement my investment income at age 55.