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Right now, I am on my late 20's, and I have this plan on retiring at 55 years old, instead of the usual retirement age of 62. For this, I plan to save money enough to cover my expenses from the day of retirement, until I am able to get 401(k) and/or Social Security benefits. I am also planning to be debt-free (no mortgage, car, credit car or personal loans payments).

I will soon be able to start contributing to a 401k again. Although I favor these types of plans, what it always bothers me is that I cannot touch this money until I am 59.5 years, which is different from the age I want to retire. Additionally, I am seeing very difficult to save on my own for retirement AND putting money away on a 401(k).

I know that 401(k) plans offers the employer pairing and the investment options, but how I am seeing it is that this comes at a price of basically being unable to use the money when I actually want to retire (at age 55).

My question is: Should I still use the 401(k), and maybe rethink my plans, or should I abstain from putting money on a 401(k), and save money by myself for retirement (with the benefit of being able to use the money at the age I want to retire)? Is there is something that I am missing on my picture?

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    16 Ways to Withdraw Money From Your 401k Without Penalty notes ways to access it earlier that may be of interest. – JB King Jul 20 '15 at 17:01
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    401k money grows tax-deferred even if your investments pay dividends or distribute capital gains. Not so with taxable savings and investments. – Rocky Jul 20 '15 at 17:07
  • The simple way is to have enough saved outside 401k/IRA accounts to live off of during that period. It's also good to have access to a nice amount of money during the 25 or so years between now and your presumed retirement. Even if you never touch a penny of it, you'll sleep better knowing it's there. And who knows? Maybe when you reach 55, you'll decide you don't want to retire. – jamesqf Jul 20 '15 at 22:52
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    While retiring at 55 is certainly possible, you may find things (spouse, kids, bigger/better house, boat, vacations, busted investments, lucrative investments) happen in your 30s that delay when you can realistically retire. Also, I wouldn't consider 62 the 'usual retirement age'. If anything, I'd say 65 is the 'usual' and 68 is quite common. By the time our generation retires, those ages will probably be pushed back a few years, thanks both to ballooning social security costs and generally healthier and more productive later years. – corsiKa Jul 21 '15 at 7:23
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    @jamesqf: no reason not to do both -- contribute to a 401k and also put aside additional savings in a taxable account. Just because there's a contribution limit doesn't mean you can't save more elsewhere. Retire early, use the taxable money at first, then start using the 401(k) after reaching typical retirement age. – Rocky Jul 21 '15 at 17:23
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While the 55 exception noted by Joe and JB makes this less of a worry, it's worth noting that to retire early most people would need additional investments beyond a maxed out 401(k). As most people make more money later in life it is generally worth putting what you can in a 401(k) now and later when your savings would max out a 401(k) then you can start adding money to accounts that are not tax-advantaged. These additional funds can be used during the bridge period.

Run the numbers yourself as these assumptions won't be true for all individuals, but this may be the piece you are missing.

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    I did not knew about the 55 exception. Then this means, in theory, I can retire at 55, and start withdrawing for the 401k right away. But as one of the links that you referenced said, maxing out the 401k does not mean I will have enough money for retirement. I will run the numbers and see. This has put me in a good direction. Thanks. – scubaFun Jul 20 '15 at 18:37
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    @scubaFun There is, in practice, no reasonable way to predict what will happen economically over the next 30 years. Compare 1890 to 1920 to 1950 to 1980 to 2010. Now, instead of picking the USA (which did, compared to the rest of the world, ridiculously well in the last 100 years), pick a random person on Earth in (say) 1920, then look at their country 30 years later. – Yakk Jul 21 '15 at 13:51
  • You may also need the additional investments outside the maxed out 401(k) to bridge the gap until the earliest date you can draw Social Security, currently age 62. – chili555 Jul 21 '15 at 14:39
  • If social security even still exists in 30 years, I'll be surprised. I'm about the same age, and just completely don't plan social security into any retirement estimates. – neminem Jul 21 '15 at 15:19
  • @Yakk While technically correct, this doesn't mean you can't plan and set yourself up to have good outcomes in a wide variety of future circumstances. The more uncertain the future the more you should understand what can be done to meet your goals. – rhaskett Jul 21 '15 at 17:09
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If one separates from work at 55 or older, they can withdraw from that 401(k) with no penalty.

You might wish to consider a mix of Roth IRA deposits as well. The deposits can be withdrawn at anytime with no tax consequence.

  • +1 I just learned about the flexibility of Roth IRAs a few months back, and was amazed, and sad I hadn't known about it and started using it years earlier (I'm 30). If I'd known in an emergency you could pull most of your money from a Roth IRA without an penalty (except the penalty that you can't immediately put it back), I'd have started investing in one ages ago. – neminem Jul 20 '15 at 18:56
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    Far too few folks are convinced to start using the 401(k) or equivalent early enough, despite regular repetition of the facts about how much difference early compounding makes and the reminder that if they don't at least claim the employer match they're cheating themselves out of part of their salary... Which is why companies have been trying to switch these from opt-in to opt-out. it's easier to believe you can spare the money if it never reaches your checkbook in the first place. – keshlam Jul 20 '15 at 19:07
  • @neminem - 30 is great. I was late 30's when the Roth started, was already in a high bracket, and stuck with pretax 401(k) and non-deducted IRAs. Take advantage of what you can, Learn all you can, you have a long life ahead. – JTP - Apologise to Monica Jul 21 '15 at 16:10
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Unless your 401(k) plan is particularly good (i.e. good fund choices with low fees), you probably want to contribute enough to get the maximum match from your employer, then contribute to an IRA through a low-cost brokerage like Vanguard or Fidelity, then contribute more to your 401(k). As JoeTaxpayer said, contributions to a Roth IRA can be withdrawn tax- and penalty-free, so they are useful for early retirement. But certainly use your 401(k) as well--the tax benefits almost certainly outweigh the difficulty in accessing your money.

JB King's link listing ways to access retirement money before the traditional age is fairly exhaustive. One of the main ways you may want to consider that hasn't been highlighted yet is IRS section 72(t) i.e. substantially equal periodic payments (SEPP). With this rule you can withdraw early from retirement plans without penalties. You have a few different ways of calculating the withdrawal amount. The main risk is you have to keep withdrawing that amount for the greater of five years or until you reach age 59½. In your case this is is only 4-5 years, which isn't too bad.

Finally, in addition to being able to withdraw from a Roth IRA tax- and penalty-free, you can do the same for Roth conversions, provided 5 years have passed. So after you leave a job, you can rollover 401(k) money to a traditional IRA, then convert to a Roth IRA (the caveat being you have to pay taxes on the amount as income at this point). But after 5 years you can access the money without penalty, and no taxes since they've already been paid. This is commonly called a "Roth conversion ladder".

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