‘I have $4 Million in a 401(k) and Want to Retire a Decade Early — What Are My Options?’

It’s pretty typical for American workers to retire in their 60s. But you may be eager to leave your career behind in your 50s — especially if you can’t stand your job and it’s a major source of stress for you.

If you have $4 million saved by the time your 50s roll around, you may be in a perfectly good position to retire. If you tap a $4 million portfolio to the tune of 3% a year (a more conservative approach, but one that may be necessary given your earlier retirement timeline), you’re looking at about $120,000 a year in income.

Now whether that works for you will depend on your specific expenses and goals. But if your home is paid-off and you have fairly low costs, living on $120,000 a year may be doable.

Plus, at some point, you’ll be able to claim Social Security, which should result in more monthly income.

But what if your entire $4 million nest egg is tied up in a 401(k)? In that case, you might run into some challenges with early retirement — despite having a lot of money saved up.

The problem with having all of your funds in a 401(k)

It can be beneficial to use a 401(k) to build retirement savings. With a traditional 401(k), you get a tax break on the money you contribute each year. And investments in your account get to grow on a tax-deferred basis. Plus, many 401(k) plans offer the benefit of a workplace match.

The problem, though, is that 401(k)s require you to leave your money alone until you turn 59 1/2. Tapping a 401(k) sooner could result in an early withdrawal penalty.

However, depending on your age and situation, there may be a workaround here.

There’s a special 401(k) rule for people turning 55. If you leave your job the year you turn 55 or later, you can tap your 401(k) from that job without incurring an early withdrawal penalty. So you may be able to access your savings without a problem if you’re at least 55.

If you’re not 55 yet and can hang tight a few years longer, that, too, could allow you to get access to your 401(k) plan without a penalty. And while you could always resign yourself to that penalty, that’s generally not a wise choice. Not only is that throwing away money, but it could cause you to prematurely deplete your savings.

Talk to a financial advisor for guidance

Early retirement is a tough thing to navigate. Even if you have plenty of savings and access to penalty-free withdrawals, there are a lot of considerations to account for, like healthcare.

Remember, Medicare doesn’t begin for most Americans until age 65. If you retire a decade early, health insurance is a big expense you’ll need to account for.

That’s why it’s a good idea to consult with a financial advisor on early retirement. They can help you navigate the pitfalls and help you transition into that next stage of life with fewer worries. They can also explain the rules of 401(k) withdrawals so you don’t end up losing money to a penalty at any stage of the game.

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