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Retiring early -- possibility or pipe dream?

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Getting by until you can collect Social Security
Perhaps the biggest challenge for early retirees is bankrolling their living expenses before they become eligible for retirement plan distributions and Social Security checks.

Uncle Sam requires working Americans to be at least 62 to begin collecting Social Security. And, generally speaking, you can't dip into your 401(k) and other retirement accounts until age 59½ without incurring a penalty.

There are some exceptions. The Internal Revenue Service will waive the 10 percent penalty for early 401(k) withdrawals if you "separated from service," or leave your job during or after the calendar year in which you turn 55.

The penalty is also waived if you agree to make withdrawals of substantially equal payments after you leave your job. These withdrawals must be made at least once a year. Except in cases of death or disability, the payments under this exception must continue for at least five years or until the retirement account owner reaches age 59½, whichever is longer.

Dipping into your nest egg early, however, is generally ill-advised. Not only are you depleting your retirement savings for the future, but the money you withdraw no longer appreciates in value from interest, dividends or capital gains. 

As such, Silbiger says, early retirees should stick to their savings and after-tax investments instead, a tall order for most.

Those who get out of the game early are often forced to begin drawing on Social Security at the earliest opportunity, which represents a significant opportunity cost, says Silbiger.

Indeed, those who collect Social Security before their full retirement age receive a permanently reduced benefit. If you were born between 1943 and 1954, for example, your full retirement age is 66. You would receive 75 percent of your full benefit if you start collecting those checks at age 62.

Visit the Social Security Administration's Web site for a complete table on retirement benefits by age.

There are plenty of other things to think about before giving your boss notice. Consider the following financial tips.

Look before you leap:
1. Eliminate debt. 4. Get health insurance.
2. Give yourself an income. 5. Prepare for all contingencies.
3. Adjust asset allocation. 6. Make sure you really want to retire.

1. Eliminate debt
In the years leading up to retirement, it's wise to get rid of as much debt as you can, not only because of the interest payments you would avoid, but because it allows you to keep your monthly expenses to a minimum.

Next: "Give yourself an income"
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