How to Fund the First Decade of Your Early Retirement
You retired early…now what do you actually live on? Early retirement is the dream for many working professionals, and logging off for the final time in your career can be immensely satisfying. However, if you retire before the age of 59 ½, it’s important that you have a portfolio withdrawal strategy mapped out prior to cashing your last paycheck. Why? Generally, you cannot access funds in a 401(k) or IRA prior to 59 ½ without incurring a 10% early withdrawal penalty. And, if you’re waiting until age 67 or even 70 to claim Social Security benefits, should you use retirement accounts to fund your 60s?
Thankfully, there are a few strategies available to help you structure your cash flow needs early on in retirement.
The easiest and most obvious solution to generate cashflow in those early retirement years is tapping a taxable brokerage account. There are no early withdrawal penalties, no restrictions on withdrawing principal versus earnings, and the tax treatment of withdrawals is favorable due to capital gains tax rates that are usually lower than one’s ordinary income tax rate. In fact, for those married filing jointly, the first $98,900 in capital gains is taxed at 0%. Yes, you read that correctly; nearly the first $100,000 in capital gains can be withdrawn tax free under current IRS rules. In other words, you could sell $200,000 of investments in a taxable account, with half of that representing your original contributions (your cost basis), and owe close to zero in tax upon withdrawal. Note that this example assumes you have little to no other taxable income in the year. Furthermore, by utilizing funds in your taxable account first, you allow your tax-deferred and Roth funds to continue to compound.
“For those married filing jointly, the first $98,900 in capital gains is taxed at 0%.”
However, not all retirees have a sizeable brokerage account balance from which to fund early retirement. For some investors, there may be very little liquid assets available outside of their retirement accounts. Fortunately, there is an IRS provision known as the Rule of 55 that can allow access to 401(k) funds before age 59 ½ without penalty. As the name suggests, it is available to those who left their most recent employer in or after the year they turned 55. The reason for leaving employment does not matter—you can quit, take an early retirement package, or be laid off—the Rule of 55 is still applicable so long as you’re at least 55 and the funds remain in your 401(k) until withdrawn. This second part is critical. If you roll your 401(k) into an IRA, you lose access to this rule. And remember, while there is no early withdrawal penalty with this strategy, every dollar withdrawn from a Traditional 401(k) is still subject to ordinary income tax rates.
What happens if you do not have significant taxable assets AND you retire before age 55? Fortunately, there is another IRS provision called the Rule of 72(t), or Substantially Equal Periodic Payments (SEPP), that can allow penalty-free access to IRA funds in addition to 401(k)s, regardless of age. However, while the provision can be a fantastic tool for the right situation, be aware that it comes with limited flexibility and significant planning must be done prior to embarking down the 72(t) path. The Rule of 72(t) allows penalty-free access to qualified retirement accounts that are traditionally restricted until age 59 ½, but you must commit to a fixed withdrawal schedule that cannot be altered. The withdrawal schedule is calculated by the IRS, and you must take this amount out every year, no more and no less. Any deviation can trigger substantial retroactive penalties. Finally, the withdrawals must continue for a minimum of five years or until you turn age 59 ½, whichever comes later. So, if you retire at age 47 and elect Rule 72(t), you must take withdrawals for approximately twelve years, all of which are taxed at ordinary income tax rates.
“If you roll your 401(k) into an IRA, you lose access to this rule and penalty-free distributions while you are under 59 ½.”
Finally, if you retire early, lack significant taxable funds, and do not have a Traditional 401(k) or IRA to use the Rule of 55 or Rule 72(t) with, there is another option available to you: Roth IRA withdrawals. Typically, it is advisable to let Roth funds compound as long as possible since the funds in these accounts are after-tax and growth is tax-free. However, Roth IRAs have an advantage in that contributions can be withdrawn without penalty prior to age 59 ½. Any earnings growth on the contributions would be subject to an early withdrawal penalty, so it is important to track the basis of your Roth accounts and only withdraw the contributions if you intend to deploy this strategy. Again, if you have access to taxable investment funds or can withdraw from a Traditional 401(k) or IRA without penalty, these alternatives might be preferable to withdrawing Roth contributions.
Okay, so you’ve successfully funded your early retirement years and have reached your early to mid-60s, now what? Turn on Social Security benefits sooner rather than later to avoid further drawing down your investment accounts? Not so fast. If you have taxable funds remaining, it can make sense to continue to fund your lifestyle with those funds, keeping your tax burden low due to capital gains rates, and let Social Security grow at a guaranteed 8% per year between age 67 and 70. Not only does this increase your annual Social Security benefit by 24% starting at age 70, but by keeping your taxable income low, you may still have the opportunity to perform Roth conversions at a low marginal tax rate before Social Security kicks in and your income (and tax rate) increases. By adding to after-tax Roth accounts, you create flexibility for yourself to take tax-free distributions in the future if needed, without increasing your taxable income. This can be particularly important if you are close to or above the IRMAA surcharges that can drastically increase your Medicare expenses if breached.
“The goal isn’t just to fund your first decade. It’s to build a withdrawal sequence that keeps your tax burden low, your options open, and your portfolio intact for the decades that follow.”
To sum it up, early retirement is achievable, but it rewards those who plan for it well in advance. The strategies outlined here: taxable accounts, the Rule of 55, Rule 72(t), strategic Roth withdrawals and contributions, and delayed Social Security are not mutually exclusive. In many cases, the best retirement income plan layers two or three of them together, depending on what you’ve accumulated and when you decide to walk away. The goal isn’t just to fund your first decade. It’s to build a withdrawal sequence that keeps your tax burden low, your options open, and your portfolio intact for the decades that follow. Only you can decide what that looks like for your situation — but better to think through these decisions now, while you still have time to adjust.
Advisory Services offered through Peak Asset Management, LLC, an SEC registered investment advisor. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All strategies and services described involve risks, tax implications, and potential limitations, and may not be appropriate for every investor; clients should consider these factors carefully before making decisions. This content is developed from sources believed to be providing accurate information and may have been developed and produced by a third party to provide information on a topic that may be of interest. This third party is not affiliated with Peak Asset Management. It is not our intention to state or imply in any manner that past results are an indication of future performance. Copyright © 2026 Peak Asset Management
