You, too, may aspire to retire early and narrow the gap between your Salad Days and Golden Years. The problem is your 401(k) is tied up (without penalty) until you’re 55, likewise your IRA until age 59 — and Social Security until you’re at least 62. What’s the secret? Planning. Here are five considerations.
Pension Payout
   Decide whether you want your accumulated pension as a lump sum or as monthly payments. Discuss it with your accountant or financial advisor. Annuity payments are steady and last a lifetime, but you don’t know what you’ll face 10 years down the road; a $650 a month annuity payment will do little to defray a $20,000 emergency medical bill.

If you opt for a lump payment, ensure your pension plan deposits it directly into an IRA or you’ll suffer a 20 percent withholding tax. One disadvantage of accepting a lump payment is the possibility of severing your relationship with the company’s entire retirement plan, including any health insurance that might otherwise have been included.

In theory, once your old pension has rolled into your new IRA you cannot touch it until you’re 59.5 years old without paying a 10 percent penalty plus tax. There are exceptions. You can take some of it out if you become disabled or if you must cover certain medical expenses. You can also use it to buy a home or pay for a family member’s education. Then there is IRS Rule 72T, which allows you to set up a monthly payment plan that you commit to for a minimum of five years. Under certain circumstances, and based on your life expectancy and IRA balance, you could decide to draw, say, $1,000 a month for five years without penalty, as long as you committed to do so regularly for five years. You’d pay taxes on it but you would have created your own annuity. Although, of course, anything you spend now will not be available to you later in life.
Social Security

Social Security benefits are based on the average of your best 35 years of work, adjusted for inflation. Naturally, the sooner you exit the work force, the more of those 35 years will be computed as zeros. A person may begin receiving Social Security retirement benefits at age 62. Those who opt to start benefits at age 62 will receive a lower amount than those who start receiving benefits at their “normal” retirement age. The normal age depends on one’s birth year. For persons born in 1937 and prior, the normal retirement age is 65. For those born in 1938–1942, the normal retirement age gradually increases from 65 years, 2 months to 65 years, 10 months. For those born in 1943–1954, it’s age 66. For those born in 1955–1959, the normal retirement age gradually increases from 66 years, 2 months to 66 years, 10 months. For those born in 1960 and later, it is 67.

The Social Security benefit is reduced by 20 percent for workers born 1937 or earlier who start taking retirement benefits at age 62. For those born in 1938–1959, the benefit reduction ranges from 20.83 percent to 29.17 percent. For those born in 1960 and later, the benefit reduction is 30 percent.

How critical is Social Security to your retirement? For planning purposes, forget it. Even if your home is paid off, you could easily require 70 percent of your pre-retirement income to maintain the same standard of living. For those retirees currently drawing Social Security, benefits typically represent only 20 to 30 percent of their total income ($800 per month is average, $1,400 per month is the maximum). It is reasonable to expect the Social Security component to decrease sharply as more of America’s “post-war demographic” climbs onto the shoulders of our Gen-X/Y workforce.
Inflation

Figure on 3 percent a year. That $50,000 you expected to live on will be worth $48,500 next year, $36,871 in 10 years and $27,189 in 20.
The mortgage

Should you pay off the mortgage or keep making payments? It depends. The interest you pay on your mortgage is tax-deductible at your regular income tax bracket, so consider it the best debt to have. Pay off the more expensive debt first, credit cards and auto loans, etc.

If you still have money to pay off the mortgage, compare the after-tax cost of the debt with how much you’re making on investments. If your portfolio averages 11 percent, as the stock market traditionally does, and your mortgage is at 8 percent before your tax deduction, leave the money in the market and continue paying on the mortgage. If your investments are in low-yield money market accounts and your mortgage is at 10 percent, pay it off. If, however, you have five years remaining on a 30-year fixed-rate loan, you’re paying almost nothing in deductible interest so there’s little reason to pay it early.
Consider semi-retirement

Retirement used to be defined as what one was no longer doing — not parenting, not working, not being actively involved. Increasingly, retirement is being defined by what one does do — second career, volunteer work, travel, sports, etc. For some people, retiring early has meant working harder. Not everyone is ready to do nothing all day, so part-time work is an option. Perhaps you’ve always enjoyed associating professionally with your peers. There’s no reason to exit cold turkey when aspects of your work are still appealing. Maybe you can reduce your hours and responsibilities, or be more selective in your projects. Your part-time earnings will also serve as a hedge against financial emergencies and will keep you comfortably in green fees and RV gas until you’re ready to buy the lap quilt and lawn flamingos.