How important is the calendar to your retirement? There’s one calendar date you absolutely need to be aware of if you are targeting retirement somewhere close to age 50.

Let me tell you a story about two firefighters that happen to be twins. Their 50th birthday was June 1st, 2020. One of the twins—let’s call him Roger from now on—he retired and separated from service in September of 2019, while he was 49. His brother—let’s call him Steve—he retired in January of 2020. Also still only 49 as he was still five months shy of their birthday.

Both Roger and Steve are in the FRS Investment Plan. But here’s the thing. Steve, even though he retires at technically the same age of 49 as his brother Roger, Steve was either smart enough or maybe just plain lucky to retire in the calendar year that he turns 50.

So why’s that so important? Because as a qualified public safety employee, if you separate from service and retire in the calendar year you turn 50 or later, you are not subject to the dreaded early withdrawal penalty from the IRS for any distributions you take from your plan. The penalty if you retire before that? 10%. And you still have to pay the tax on that 10%.

Let’s put this in context. Assuming both Roger and Steve need $6,000 a month of net income from their retirement plan to meet their expenses, Roger’s going to pay over $100,000 in penalties before he gets to age 59 ½, when those distributions are no longer subject to early withdrawal penalties.

That’s quite an advantage Steve has for waiting just four more months to pull that retirement trigger.

Would there be a way around that 10% penalty for Roger if for some reason he just had to retire earlier? Actually, there is. But it’s rather complex and has some very strict rules. It’s all described in section 72(t) of the Internal Revenue Code, and if you are considering it, make sure you are getting good advice from someone who has done it many times before. The penalties for doing it wrong are severe.

It's a real advantage for you, if you are a government employee, being able to retire and draw funds at the age of 50, without incurring the dreaded early withdrawal penalty. Just make sure you have your dates down solid if age 50 is coming into play in your retirement plan.

Schedule a complimentary consultation with a fee-only financial planner to discuss your personal situation in more detail.