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Do You View It as Retirement or Financial Independence?

When Social Security was instituted, age 65 was chosen because that was the average age of mortality. That's how long you could expect to live. Anything after that was a bonus.

Who today is thinking thoughts such as that? Not you, I'll bet. There are a lot more years ahead of us, even when we reach the ripe old age of 65. Not only that, but many people can and do retire before 65. Ag 62 is a frequent target, and 60 is not uncommon. Retirement at 55 is also not unheard of.

Let's look at early retirement at age 55. You are hardly ready for the rocking chair, but now you can spend more time doing the things you love to do. You are hopefully financially able to generate a comfortable living for the next 40 years from your retirement plans, investments, and eventually Social Security (at age 62). Is this retirement? Hardly. It's financial independence.

There are, however, two major financial issues that this scenario raises. First, it is very important to maintain health insurance coverage until Medicare begins (at age 65). The second problem is generating income from your assets until age 59 ½ when you can tap into your retirement plans and/or IRAs without getting stuck with that 10% early withdrawal penalty.

The health care issue can be addressed by first extending your employer's coverage for the full 18 months after retirement with benefits guaranteed by COBRA (Consolidated Omnibus Budget Reconciliation Act), if you are eligible.

During this period, contact a qualified health insurance agent and get comparable quotes on an individual policy. There are options. You may want to consider a "catastrophic" health policy, which has a high deductible (e.g., $5,000, $7,500 or $10,000). You will pay for all of the initial costs of your health care, but this will reduce your premiums to a much lower rate.

As far as income is concerned, it is possible to gain access to your retirement assets before age 59 ½ without a penalty. The IRS gives us three ways to annuitize retirement accounts without penalties. However, you still must pay income tax on the distributions. With any of these methods, you must take distributions for a least five years or until age 59½, whichever is longer.

If you choose to delay your retirement distributions, you can systematically liquidate your personal investments. In some cases, it may be beneficial for you to borrow money to live on, particularly if the market is trending downward temporarily. You could, for example, access the equity in your home through a home equity loan to finance your needs and living costs.

You'll be able then to do those things you want to do, because, in the truest sense, you won't be retired. And, like others who have achieved financial independence before they retire, you may just find that planning to deal with these problematic issues well in advance is well worth the effort.