Pretirement Using the Rule of 55: Access the Stash before Age 59 1/2

One little-known worm-hole in the financial universe is The Rule of 55.  It only applies to certain workplace retirement plans, like 401ks, 403bs and the Thrift Savings Account. The rule does not apply to IRAs or Roth IRAs.  It does not even apply to every single 401k plan and their equivalents.  You have to research your own employer’s plan’s rules to see if it’s in the fine print.  I have done that research for my wife’s plan and mine, which required calling the fund companies that administer our work place plans.  I did not find our in-house Benefits staff knowledgeable about it.  Thanks to my research, low and behold, The Rule of 55 applies to both of our plans, meaning that we can access our workplace retirement funds for pretirement in the year in which we turn 55 or later – if we separate from employment.

If you’re a saver, you probably have a lot of your funds squirreled away in IRAs, a 401k, 403b or another tax-advantaged account.  If you have been contributing throughout your career, these funds likely comprise a large part of your nest egg.  There might be enough in your 401k to pay off your mortgage, buy the nicest BMW, or a second home. For cash!

Of course, you’re not going to do those things with your hard-won “retirement accounts”, because they are intended to support you later in life.  For that reason and to incentivize your own protection, the retirement account rules are that you generally need to be aged 59 1/2 to access those funds without incurring a large 10% penalty, in addition to the usual income taxes.  Not many portfolios are large enough to withstand that kind of assault.

However, there are various little-publicized yet legal caveats that allow an investor to access those funds earlier, if needed or wanted, without the 10% penalty.   Different plans allow for loans and they have provisions for educational or emergency purposes. There is also a method called the 72t Rule, which allows a person to tap his or her IRA before age 59 1/2 using “substantially equal periodic payments.”   Others have hacked the Traditional and Roth IRA rules so that they can withdraw the funds that they deposited five years earlier or more, using a “Backdoor Roth”.

If any of those financial gymnastics appeal to you, you can Google around to learn about them.  I have used none of them, because they seem complicated and, regardless, I’m not here to provide anyone any financial advice whatsoever.  Though I have an avid appreciation for the benefits of smart personal finance, you should know that I was a history major in college.  Technically, I was an economic history major but that still does not qualify me to give you financial advice.

What I can tell you is what we’ve done in our family, which is to access our stash earlier than 59 1/2 so that we can lean on it as a third leg of the stool along with our two careers.

One little-known worm-hole in the financial universe is The Rule of 55.  It only applies to certain workplace retirement plans, like 401ks, 403bs and the Thrift Savings Account. The rule does not apply to IRAs or Roth IRAs.  It does not even apply to every single 401k plan and their equivalents.  You have to research your own employer’s plan’s rules to see if it’s in the fine print.  I have done that research for my wife’s plan and mine, which required calling the fund companies that administer our work place plans.  I did not find our in-house Benefits staff knowledgeable about it.  Thanks to my research, low and behold, The Rule of 55 applies to both of our plans, meaning that we can access our workplace retirement funds for pretirement in the year in which we turn 55 or later – if we separate from employment.

Let’s break down that last critical, guiding phrase into two components.

To access our workplace retirement funds penalty-free, we must have reached the calendar year in which we turn 55.  In other words, we can be 54! Happily, like me, my wife has been an avid saver, maximizing her pre-tax retirement account savings for years, enjoying the large benefits of tax-deferral, her employer match and the “catch-up provision” that allows a saver to save even more starting at age 50.  Also happily, she’s a little older than me.  So, when she decided to step down from her last position for a needed break at age 54 she qualified for The Rule of 55, because her 55th birthday was coming soon in that same calendar year.  Since her separation from employment, she’s been making withdrawals from her own retirement fund, penalty-free, to support her enjoyable sabbatical.  Regular income taxes will still be due, just as if she was working.

As we joke about, I’m a mere pup at 52. I, too, will qualify for The Rule of 55 with my employer’s plan only 14 months from now.  How?  Thanks to my parents, my birthday is very late in the calendar year, meaning that the calendar year in which I turn 55 will begin just after I’ve turned 54, so I get nearly a twelve month head start on The Rule of 55.  Thank you Mom and Dad!

The big catch is, of course, I would need to leave my employer, which I am not ready to do.  I’m enjoying my work and my salary and am still in full Benjamin-stacking mode.  Still, the peace of mind of knowing that my wife and I don’t have to wait until 59 1/2 to pretire, assuming the rest of our Vanguard plan checks out, as it does, is huge comfort for us.  My wife is taking a pretirement break while I work, because we choose to.

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Pretirement Motivation: The Bosses I’ve Had

The longer I work, the more the quality of my relationship with my supervisor seems to count toward my job satisfaction.  I’ve had several managers in my life with whom I worked for significant stretches of time.  I was really fortunate with most of them but, two of them, well, hoo-wee!  They did more to plant me on the long path to pretirement freedom than anything else.  More later about what I learned from working for them, and getting away from them.  If it’s true that we learn the most from the challenging people in our lives, then I am grudgingly grateful for this pair’s abundant gifts to me.  Or something.

The longer I work, the more the quality of my relationship with my supervisor seems to count toward my job satisfaction.  I’ve had several managers in my life with whom I worked for significant stretches of time.  I was really fortunate with most of them but, two of them, well, hoo-wee!  They did more to plant me on the long path to pretirement freedom than anything else.  More later about what I learned from working for them, and getting away from them.  If it’s true that we learn the most from the challenging people in our lives, then I am grudgingly grateful for this pair’s abundant gifts to me.  Or something.

When I started out in my career, trying to get my first foothold on the rock face of the mountain climb ahead, I didn’t care to whom I reported.  “Just gimme the job and I’ll figure it out.”  In my twenties my attitude and best plan was that I wanted some kind of a coherent non-profit career.

What a strange thing the manager/report relationship is, when you step back.  You’ve had maybe one or two interactions with the person in an unnatural competitive interview process.  The next day, that near-stranger holds a huge amount of power over your every day existence and entire professional future.

Managers matter, too.  In college, one of my very best friends and I held part time jobs working at a golf club with a team of other students.  We took golf bags off carts, cleaned the clubs and kept the driving range stocked with balls.  Clearly, the job was not complicated or demanding, which was a perfect counterbalance to working so hard for good grades.

One day, the assistant golf pro who managed us, an easy-going fellow, was suddenly gone. I never learned why.  In his place was a new guy, Wade, who was memorable to me only because he was wound so tight that it was comical to other people.  It was a golf course, not a hospital emergency room, but Wade was prickly, ambitious and clearly insecure in his new assistant golf pro role.  I don’t actually remember any words he ever uttered but, as with nearly everyone we humans encounter in life, I recall perfectly my inner reaction to him:  Poor Wade’s vibe was, “Saguaro Cactus.”

In fairness, the assistant pro job was probably an important promotion for Wade, because this private club was selective, expensive and had an influential membership.  Wade sometimes manifested his innate stress by snapping at us about this or that inconsequential thing.  He caused the fun tone we had previously enjoyed to evaporate from our little team of eager college kids, who were mostly there to earn a few simple bucks without a lot hassle.

I never had words with Wade but my friend did.  I don’t remember when Wade left my life or vice versa, but I happily and instantly erased him from my mind.  Years later, his name came up when I was talking with my good friend.  Right out of college this talented friend had started his own software company at the dawn of the dot.com era.  His company followed the classic tech startup script: Identify a niche, write some code, create a product, secure some sales, attract  venture capital, grow the staff to hundreds and, in a few years, sell the company.

He still works full time for himself, though he probably doesn’t have to anymore.  I once asked my friend his motivation for starting his own companies, which always awed me as a person who gravitated to what I felt was the comfort and safety of large organizations.  He didn’t hesitate:

“You remember that guy Wade?”

It took me a beat before I did. “Oh, that guy.  Ha!  I wonder where he is now?”

My friend said, “I don’t know, but I couldn’t see myself working for jerks like him the rest of my life.  That guy made me determined to never have a boss.”

I, on the other hand, proceeded to have several bosses, and I take responsibility for my choices.  I always assumed I had no business having a business, and I think I was 100% right about that.   I also never saw myself as an S&P 500 corporate type, because corporations seemed to me dog-eat-dog environments, where the profit motive caused people to step on someone’s head while competing to climb the ladder.  Now that I have some career experience, I’m sure that’s mostly an incorrect Darwinian stereotype about major corporations.  Nor did I see myself in the military, though I really admire people I know who did go that route. I think I might have liked the Navy or Coast Guard, but that’s just my current self speaking to my earlier self, which is pointless.

Rather, I distinctly decided during my senior year in college that I wanted to pursue my passion for trying to make a difference through some kind of public service, and that I’d probably do so working for a larger non-profit organization or government agency.  I assumed non-profit organizations filled with passionate people who worked to make a difference in the world were also places where I stood the best chance of being treated as a human being myself, rather than an expendable corporate cog, which seemed kind of important, too.

I’m not qualified to judge corporate life with any accuracy but I think I was basically correct about non-profits.  I’ve generally been treated well and I feel that, frequently, I’ve enjoyed the satisfaction of having helped make a difference.  For the most part, I’ve reported to humane leaders who appreciated my contributions and who coached and rewarded me fairly.  I’ve tried to model my own behavior as a manager on what I learned from those fine leaders, some of whom remain mentors and even friends.

I also learned a lot from surviving the more toxic leaders I reported to.  A couple of my many educational takeaways from them were:

  1. “Don’t wish for my boss to change.  I’m the one who needs to change something.”  When I have realized in the past that I’ve lost respect for my manager, I have learned that I am one who needs to act.  People above them have different relationships with them, so no one is likely going to act because I’m unhappy.  It was easy to remain stuck by fooling myself that “This is just how work and bosses are”.  That is simply not true.  I need to analyze the situation and calculate my happiness level in it then, if necessary, start sharpening my resume and cultivating my network.
  2. Life is too short to be unhappy at work.  Some of the most miserable people I have ever met address their unhappiness with work by trying to cement themselves in place more firmly.  Their hate for their jobs and unwillingness to solve it through taking action puts them in a posture of constant pain, which manifests in all kinds of toxic behaviors.  They seem to me like a child who thinks that if he holds his breath long enough, the person he’s angry at will pass out.  Not me.  I believe in monitoring my work happiness and remaining prepared to leave when the organization I once worked for has changed around me unsatisfactorily in some way.  I try hard to stay entirely positive and grateful about being employed but also committed to freeing myself to do something else, if needed.  We work in this modern world of few pensions, few protected unions, no contracts and “At-Will Employment.”  If there is to be any fairness at all in such a lopsided world, we have to approach the agreement to hold a job as a two-way street.

Though my current situation is a good one, a big point of this blog is to help me plan for how to spend my time after I eventually retire the sword and want to do something else, as nearly everyone my age seems to be contemplating.  What I want is still a work in progress.  I hope through this blog that I can explore myself but also learn from others’ experiences in creatively tackling this common question stemming from a growing desire for more work freedom.  In other words, I want to start defining my pretirement.

That exploration is still ahead of me but I realize after nearly three decades of working for organizations, during which I’ve had several significant supervisors, some of whom were wonderful to know and others whom I was relieved to flee, I think I am evolving to the place that my good friend started out with:  At some point, I want to be done with bosses.

What about the bosses you’ve had?

Pretirement Freedom

As apt and evocative as the FIRE acronym is, the “Early Retirement” half of it is not our mindset.  Like lots of people, we find ourselves somewhere on the middle of the continuum of paid work-to-unpaid activity.  The best alternative word to “retirement” that I’ve encountered that more accurately describes what we’re about is “pretirement”*.  I look forward to learning and sharing in this blog our own and others’ unique journeys of pretirement.  I think the next enjoyable phase of life will feature dialing economic pursuits up, dialing them down and dialing them all around as we choose how we work.

Have you noticed how the word “retirement” isn’t very useful?

There’s nothing wrong with being retired, spending one’s days however one wishes.  My grandparents had an idyllic retirement in many ways.  They lived in the Georgia countryside, had a giant garden, drove huge American cars, went fishing whenever they wanted, and cooked fresh food nearly every day.  Their retired friends visited them, often unannounced and bearing gifts of produce, leading to spontaneous pea shelling or corn shucking sessions under the car port, where the most entertaining homespun story-telling imaginable occurred.  Best of all, they lavished time and attention on my brother and me as kids, taking us on summer road trips for weeks at a time.  When we were with them, the only time our grandparents weren’t spoiling us with their love and attention was when their soap operas came on, at which time we were hustled outside to play.

The paradox is, they were “retired” but they were also busy.  Today, too, when people finally unchain themselves from paid work many of them soon say, “Wow, I thought I retired but I’ve never been so busy!”  They are volunteering, running errands, traveling, doing house projects, and visiting friends.

Sounds pretty good, right?  So, what’s my problem with the word “retirement”?  In our work-oriented culture, it implies that one’s paid career is over and now the retiree is dedicated to full time leisure.  It’s binary:  You work until you don’t have to any more.  Earning is either happening full time or it’s never happening again.  On/Off.

The problem is, On/Off is not what I observe in very many post-career people.  To be sure, some former workers are dedicated to unpaid leisure.  Bully for them, if they can afford it and if it’s what they choose.  Other people encounter health challenges or care-taking situations that require their focus.  Still, I observe a lot of post-career people doing a variety of activities, which is a mixture of leisure, service and paid.  A lucky few can’t tell the difference.

People no longer working full time might still be at their traditional employer but on reduced hours, or consulting a bit, or driving for Lyft, or running an Airbnb.  I am secretly envious of the clerks down at the hardware store working a few hours per week and seeming to enjoy cheerfully welcoming customers and helping them find what they need.  When I visit REI I seek out the staff my age and ask if it’s fun to work there (yes, apparently, though it’s tempting to buy too many gadgets and clothes).

Even my retired grandparents were economically active their whole lives, considering that they owned some commercial property in town and regularly sold timber from their land to the local paper mill.  My own parents are in their late 70s and are still engaged with part time work.  My dad experimented with full blown retirement at age 75 but soon discovered he liked being an engineer too much, so his former company gladly rehired him to continue designing machines 3 days per week.

“Retirement” also doesn’t seem to fit the new generation of “FIRE” enthusiasts.  If you haven’t yet encountered the burgeoning FIRE community online, it consists of thousands of avid savers and investors aiming to decouple themselves from job-dependence just as soon as possible by becoming Financially-Independent/Early-Retired.

People pursuing FIRE are committed to their goals and to living their lives intentionally to a degree that really impresses me.  The simple idea of FIRE is to leverage one’s job to create permanent financial security.  They limit debt and moderate consumption, using the resulting large marginal income to build an investment portfolio as quickly as possible that is sufficient to support their required spending forever.  Portfolios usually consist of simple, low-cost and entirely passive stock and bond index funds, though a few are building up rental real estate holdings or other businesses.

Someone who can achieve financial independence in their 30s, 40s or 50s thanks to visionary goal setting and uncommon financial discipline is probably not the type of person who will gladly pivot easily to the hammock of full-time traditionally-conceived “retirement,” umbrella drink in hand.  No, these people are so productive that they probably can’t help but continue attracting earned money, only now these “FIREd” folks work creatively on their terms.  That’s what I want to do.

I have been consuming the abundant and inspiring FIRE-related blogs, podcasts, books and other media for years now, so I count myself a fan and avid participant in this friendly, positive and supportive community.

At age 52, I’m also getting very focused on acting on what I’ve learned.  Long before the FIRE acronym was coined and its online community emerged, my wife and I lived beneath our means, saving and investing 30-50% or more of our income starting in our 20s, even as we worked in the non-profit sector our whole careers.  We’ve never felt that we have sacrificed anything important to us.

I lead us on this path, though my wife certainly does her part.  I was compelled to take advantage of the tax reductions and employer matches in our 403b plans (the 401k equivalent of the non-profit sector), which together amounted to a half-price sale on dollars.  There was nothing we really wanted to consume that made us want to dial back savings and turn away from the opportunity to save with the helpful tailwind from the government and our employers.  Rather, we always found little ways to increase our savings rate every year, little by little, until we maxed out all of our tax-advantaged savings vehicles, so we then started saving and investing after tax dollars.

We simply directed our savings and employer matches automatically into stock index funds until our late 40s, when we started gradually adding a total bond index fund into the mix for some ballast to the stocks’ inherent volatility.

We also bought and renovated a few old houses, one at a time as we lived in them, making some profit along the way.  We aren’t aggressive “fixers and flippers” but we discovered that we enjoy learning new skills to beautify our living space as a satisfying creative outlet.  In hindsight, renting places to live would have probably been the better choice from a purely-financial perspective but, then, we obviously do not live our lives in order to obtain maximum money.  After all, we’ve had non-profit careers and, as Jerry Seinfeld once said, “‘Non-profit’.  That does not sound like a good business model!”

I enjoy my full-time job raising money for a wonderful organization that a lot of people rely on.  I still feel a strong sense of mission about my work in philanthropy. Still, like most everyone I know at my age, my wife and I are sort of looking to do something different.  The marginal returns of habitually expanding our careers feel to us to be diminishing a bit.  We’ve accomplished a lot of our career goals.  We’re not as willing to prioritize work over the rest of our lives.

Some people I know, however, have identified things they want to do and are not waiting to do them.  One work friend, a model for our field and at the peak of his earning potential, now that his kids are out of college is dialing down his career in his late 50s to become a clown.  Literally.  He’s reduced his work hours and will attend clown school with a plan to entertain people in nursing homes.  He’ll be the best clown ever, too.

I am not driven to be a clown but I celebrate his intention and want to model it.  Fortunately, I am inspired by the possibilities of freedom in the state of FIRE and its many avid practitioners.  I am making plans to leverage the reasonably strong financial position we’ve built over several decades, using the portfolio as a kind of 3rd salary to support some exploration and discovery that might be different than what I’ve been doing for years now.  I’ll look forward to chronicling the journey in future posts.  I want to learn how other people, like my clown friend, are making the leap, too, and to feature their unique experimentation here.

My wife is taking a needed break this year from her career, which gets me back to the title of this blog:  Through our own longstanding FIRE habits, we realize we can work and live, pretty much as we choose to.  We can dial it up or we can dial it down.  Right now, I’m dialing work up and she’s dialing it down for a while, because we choose to.  If we choose something different later, we’re in a position to act.  For example, we plan to both dial it down in a few years for a gap year or so to travel internationally.  That goal is another adventure I want to chronicle here so we can learn about others’ rich experiences while traveling.

As apt and evocative as the FIRE acronym is, the “Early Retirement” half of it is not our mindset.  Like lots of people, we find ourselves somewhere on the middle of the continuum of paid work-to-unpaid activity.  The best alternative word to “retirement” that I’ve encountered that more accurately describes what we’re about is “pretirement”*.  I look forward to learning and sharing in this blog our own and others’ unique journeys of pretirement.  I think the next enjoyable phase of life will feature dialing economic pursuits up, dialing them down and dialing them all around as we choose how we work.

*The Wikipedia page for Pretirement describes “the emergence of a new working state, positioned between the traditional states of employment and retirement.”