This Early Retirement Withdrawal 401k article describes how and when to setup an income stream from your 401k.
On November 30, 2011, I retired early from my career of 28 years at age 55. For the previous 2 years I researched retirement planning. I knew that I would not be able to access my IRA until age 59 1/2, but when I discovered that I could access my 401k savings before that age, I was thoroughly delighted! And excited!
The only requirement to be able to withdraw from a 401k without owing an early withdrawal penalty is that you must terminate employment in the year you turn 55 or later.
It is mandated by the government that 401k providers must withhold 20% for federal income taxes, but if your income is not too high, you may be able to get a refund of some of it at tax filing time.
My state doesn’t require withholding for amounts as small as mine, so you may or may not need to have state income tax withheld.
In preparation for early retirement, we saved about $30,000 in a cash savings account to cover unexpected expenses and any large purchases we might want to make.
This extra cash came in handy as a source of funds between my last paycheck and my first withdrawal check.
In December, I contacted my 401k provider to find out how to setup my monthly withdrawals. I had already prepared and tested a retirement budget so I would know how much would cover our typical spending habits and living expenses.
An advisor was assigned to me and we started off with a 2 hour phone meeting.
My provider offers free advice to account holders, and in order to give good advice, they follow a process of discovering the client’s goals as well as their investment preferences and tolerance for risk.
This diagram shows one way of allocating investments. Withdrawals can come from all categories or they can be taken just from the fixed income or cash portions.
From the information gathered from our meeting and from my accounts, the advisor prepared a booklet of recommendations for changes to make to the portfolio. The goals were to balance risk and address capital preservation.
I need to continue keeping some of my investments in equities, but some in more conservative bonds, and some in a cash account from which withdrawals would be taken.
Each year we will meet to review the portfolio, as well as to re-balance the accounts.
In the next phone meeting, we reviewed the forms that would be needed for requesting the periodic withdrawals. This part requires my husband's participation since he is legally entitled to a share of my retirement savings, as I am to his. He had to go with me to a Notary Public to sign one of the forms. (Next month, I’ll have to do the same when we get his withdrawals setup.)
My first withdrawal check was cut on February 1, 2012. IT FEELS GREAT!!
Also, when I checked my account to see if the withdrawal was correct, I expected to see a lower number for my total portfolio.
I was really pleased to see that my total account was even higher than before the withdrawal, coinciding with a series of happy stock market days!
Advice to other early retirees: If you don’t want to go 2 months without an income, I suggest you contact your provider about 2 months before your last day of work.
This way, you can submit withdrawal instructions immediately after your last day.