72(t) & Rule of 55: Options for Early Retirees
- John-Mark Young
- 1 day ago
- 5 min read
There is a new kind of retiree emerging—what we might call the Everyday Millionaire, Generation 2.0.
These are men and women who didn’t stumble into wealth. They were raised—often quite literally—on God’s wisdom and Grandma’s advice, later reinforced by decades of Dave Ramsey’s teaching. They avoided consumer debt, bought homes they could afford, saved faithfully, and committed to investing 15% of their income year after year. As we saw in the Ben & Arthur example, that discipline almost always leads to more than enough.
And because they paired wise saving with good financial planning and thoughtful tax strategy, many in this group will not only retire securely—they will be able to retire early, if they choose.
But that raises an important question:
What does “early retirement” even mean?
Social Security calls full retirement age 67.
Medicare opens the door at 65.
Your retirement accounts remove penalties at 59½.
So there is no single, universal retirement age.
For the purposes of this chapter, we’ll define early retirement as leaving the workforce before age 59½, when retirement accounts normally become accessible without penalty.
That’s where the anxiety often sets in.
“If I retire at 55 or 56, am I locked out of my retirement money?”“Do I have to rely only on a bridge account?”
The encouraging answer is no.
There are two well-established, IRS-approved ways to access retirement funds early without paying the 10% penalty—if you follow the rules carefully:
Rule of 72(t) – also known as SEPP (Substantially Equal Periodic Payments)
Rule of 55 – specific to employer retirement plans
Let’s walk through each.
The Rule of 72(t): Turning Retirement Savings into an Early Paycheck
The Rule of 72(t) is part of the tax code that allows you to take penalty-free distributions from a retirement account before age 59½, as long as those withdrawals follow a very specific structure called a SEPP plan.
Think of this as voluntarily turning part of your retirement account into a temporary pension.
How a SEPP Plan Works
Under a 72(t) plan:
You take substantially equal periodic payments
Payments must continue for at least 5 years, or until you reach age 59½—whichever is longer
Payments can be taken monthly, quarterly, or annually
Once started, the plan is largely locked in
If you follow the rules precisely, the IRS waives the 10% early withdrawal penalty. However—this is important—the withdrawals are still taxed as ordinary income, so tax planning on these distributions is still important.
One Account at a Time
A SEPP plan applies to one retirement account at a time. That’s actually a feature, not a bug. For example, someone who has $2 million of retirement savings could put $1,000,000 in a 72(t) IRA where they are largely locked into their distribution strategy, whereas the remaning $1,000,000 could be put into a separate IRA where the distributions would be free of the rule of 72(t), giving additional flexibility if needed.
It allows careful planners to:
Isolate a portion of assets for income
Leave the rest invested for long-term growth
Maintain flexibility elsewhere in the plan
The Three IRS-Approved Calculation Methods
The IRS allows three primary ways to calculate your 72(t) distribution. Each produces a different income level.
1. Required Minimum Distribution (RMD) Method
Based solely on IRS life expectancy tables
Payment recalculates every year
Generally produces the lowest income
This method often appeals to those who want maximum preservation of retirement assets while drawing a modest income.
2. Fixed Amortization Method
Uses life expectancy and an interest rate
Produces a fixed payment every year
Usually results in higher income than RMD
This is often chosen when predictable, paycheck-like income is the goal.
3. Fixed Annuitization Method
Uses IRS mortality tables and an interest rate
Payments remain fixed
Income typically falls between RMD and amortization
Each method has trade-offs, and the “best” option depends on your cash-flow needs, tax situation, and long-term plan.
A Real-World Example
Let’s look at a hypothetical 55-year-old with $500,000 in a retirement account.
Depending on the method used, annual income could range roughly from:
$11,000–$16,000 (RMD method)
$24,000–$28,000 (Fixed amortization)
That’s meaningful income—without penalties—created from savings you already built.
The Strengths—and Serious Commitments—of 72(t)
Advantages
Avoids the 10% penalty
Creates predictable income
Can serve as a bridge to Social Security or other benefits
Offers some customization at the start
Disadvantages
Inflexible once started
Payments generally cannot be changed or stopped
No additional withdrawals allowed
Reduces long-term compounding if not planned carefully
This is not a strategy to “try out.”It is a strategy to commit to—with professional guidance.
The Rule of 55: A Simpler Path for Workplace Plans
The Rule of 55 is often overlooked, but for the right person, it is beautifully simple.
If you separate from service in the year you turn 55 or later, you may take penalty-free withdrawals from that employer’s retirement plan—typically a 401(k) or 403(b).
Key Distinction
✅ Applies to employer plans
❌ Does not apply to IRAs
❌ Does not apply if funds are rolled into an IRA
In other words, where your money is located matters.
Important Considerations with the Rule of 55
Some plans do not allow partial withdrawals
Roth 401(k) earnings may still face taxes if the 5-year rule isn’t met
Funds must stay in the former employer’s plan
Withdrawals reduce future growth—so moderation matters
Susie’s Story: Early Retirement with Purpose
Susie spent 32 years in corporate America, faithfully following Baby Step 4. By her early 50s, she had built a $2 million 401(k).
As she approached age 55, she felt called to step into ministry work at a local pregnancy center.
Here’s how the Rule of 55 helped:
Susie retired in the year she turned 55
Because of that timing, she could access her 401(k) if needed
She later contributed to the Pregnancy Center's 403(b) up to their modest 3% match
When she retired again at age 58, the 403(b) account also became accessible under the Rule of 55
She never rolled her funds into an IRA—and that choice preserved her flexibility. That’s not luck. That’s planning.
Bringing It All Together
Early retirement is not about escaping work. It’s about retiring to something better.
For the Everyday Millionaire 2.0, the question isn’t “Can I retire early?”It’s “How do I do it wisely?”
The Rule of 72(t) and the Rule of 55 are not loopholes. They are tools—meant to be used carefully, prayerfully, and strategically.
When coordinated with:
Bridge accounts
Roth strategies
Tax-aware withdrawal planning
And wise counsel
They allow faithful stewards to enjoy the fruit of decades of discipline—without fear.
“The plans of the diligent lead surely to abundance.” — Proverbs 21:5
If early retirement is on your horizon, this is where thoughtful planning turns possibility into peace.
