Retiring Early into Part-Time Employment

Retiring early is an option if you pay close attention to your budget and investments. Retiring gives you fewer years to build your nest egg and increases the number of years you'll spend in retirement. Tax laws, pensions, and social security also need a closer look if early retirement is in your future.

Investment Considerations

Retirement is a transition, not a finish line. Life after retirement is very similar to life before it; you'll have monthly bills, car payments, and other regular expenses. The economy and the stock market will continue to go through the same cycles they do now. Retirees often think differently about these realities because they are relying on their investments to support them, not their job. Consider how economic fluctuations, and the continuing pressure of day-to-day finances, will affect your attitude in retirement, then plan your investments around your concerns.

Early retirement means inflation will have longer to act on your expenses. Be sure your portfolio continues to hold stock investments even after you stop working. A mix of bonds and fixed-income investments that pay interest can reduce the volatility of your accounts. Many investment companies have tools and calculators to help you decide how much of each to hold.

Don't let your feelings about the current economic or political environment color your entire retirement plan. Economics and politics work in cycles. If you are retired for thirty years, you will go through many of these cycles — good and bad. Construct a sound plan, and then stick with it.

Tax Planning

Retirement accounts such as IRAs and 401k(s) have rules that penalize you for withdrawing money before age 59½. If you retire early, you can use a scheme called “substantially equal payments” to withdraw income from the accounts before that age without penalty. The calculations for this are very precise and the penalties high if you make a mistake and withdraw too much or too little. Be sure to consult a tax professional for help if you decide this is a good option for you.

Make your portfolio more tax efficient by concentrating your income-generating investments — such as bonds and fixed-income investments — inside your retirement plans and your stock investments in taxable accounts outside retirement plans. Stock dividends and capital gains are taxed at a lower rate than interest income. Stock investments are also more volatile than bond investments, and if they are in taxable accounts you can take advantage of this using a strategy called “harvesting gains.” By selling equal amounts of investments that have gained and lost value, tax can be reduced because capital gains and losses cancel each other out.

Take advantage of tax laws that let you cancel out taxes on investments sold at a profit by also selling investments that have lost money. This strategy is called harvesting gains. Realize gains or losses by selling an investment; capital gains can be reduced by the amount of capital losses you realize in the same year.

Pensions and Social Security

Many pensions will allow you to start drawing before age 60 if you retire, but the benefit is often reduced. Pay close attention to how early retirement affects your pension benefit. Most pensions increase significantly in the last few years you work. Be sure you calculate the benefits you're losing if you retire early.

If you're eligible for a state pension, your social security may be reduced under a rule called the “windfall” provision. Check with your retirement benefits coordinator at work, or online at for details. If you worked under social security for a long time before moving to the state job, you might be eligible to collect from both.

Federal social security benefits are not available to you until age 62. If you retire before then, plan on making extra withdrawals from your nest egg to cover expenses until then. In most cases, it's best to start drawing social security as soon as you're eligible, unless you're working part time. Social security benefits are reduced if you are under age 65 and earning an income. Once you're age 65, you can collect social security and still work without reducing the benefit.

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