Be careful about any early retirement plans

Q. I hate my job and want to retire in a few years when my wife and I are both age 52. I have about $500,000 in my 401(k) and will need about $50,000 a year after taxes to meet my expenses in retirement. My Social Security benefit will be about $1,600 at age 62. My wife has never worked outside the home, so she doesn't have any retirement accounts or Social Security benefits. What she does have are wealthy parents. They have already told us that their wealth will be split evenly between my wife's sister and her husband and us. As it stands now, they figure each family will inherit around $1 million. They are in their early 80s. My plan is to retire, roll my 401(k) funds to an IRA, start one of those 72t things to avoid the 10 percent penalty, take Social Security at age 62 and not worry about running out of money since my inheritance should kick in by age 65, 70 at the latest. What do you think of my plan?

If I still worked at my previous employer, I'd probably feel the same way you do about wanting to retire sooner than later and know that I'm fortunate to now love my chosen field of work. With that said, not many people can afford to retire at age 52 and even if they hate their jobs they must continue to work. With the current rate of unemployment, even those who dislike their jobs should be thankful they have one. I wouldn't call what you have in mind an actual plan for several reasons; I'll begin with the "72t thing" idea.

Under the tax code "72t" you can avoid the 10 percent early withdrawal penalty tax if you take "substantially equal period payments" from an IRA. You will have to pay regular income tax on the withdrawal, but you avoid the 10 percent penalty tax even if you are under age 59-1/2. To take a series of substantially equal payments from your IRA without penalty, you must withdraw money at least once a year, and you must keep taking money out for five years or until you reach age 59-1/2, whichever is later. The amount of the withdrawal is calculated based on the balance of your retirement account Dec. 31 of the preceding year. You must choose one of three IRS approved methods to calculate withdrawals. The choices are the life expectancy method, the amortization method and the annuity factor method.

The amortization method or the annuity factor will usually allow for the higher withdrawals. Mistakes in the calculations can be costly. Any changes in the withdrawal schedule after you've begun subjects you to the 10 percent tax penalty, and interest applies retroactively to all previous withdrawals. Based on an IRA value of $500,000 and age 52, the maximum you can withdraw is less than $20,000. Even before paying income tax, this is a much lower amount than the $50,000 you want to meet expenses. Consider waiting to terminate employment in or after the year you reach age 55. If you leave your 401(k) intact, you will have much more flexibility in the amounts you can withdraw and avoid the 10 percent early withdraw penalty.

Even if your wife did not work outside the home, she will be entitled to a spousal benefit. If you both begin Social Security at age 62, she will receive 50 percent of your benefit. Taking Social Security at age 62 will result in reduced benefits during your lifetime and reduced survivor benefits.

Basing your ability to retire on the assumption of an inheritance is rarely recommended; there are too many unknowns. Counting on your wife's inheritance from her parents is definitely not a good plan. What if your wife should predecease both you and her parents? Do you think they will still include you in their will or trust? If so, would it be at the same level as if your wife were still living? In the unlikely but possible event you and your wife divorce, what happens to your plan? I doubt her parents would provide you as an ex-husband with any inheritance. What if your wife receives her inheritance and then you divorce? You would not be entitled to any of her inheritance since it is not considered marital property. A severe illness in the family can easily deplete life savings. Even if her parents remain healthy, something could happen to your wife's sister or another family member, such as a grandchild, which could completely alter their estate plan.

Developing a plan with a knowledgeable objective financial planner would be worthwhile.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.