There are certain steps—save as much as possible and invest appropriately, for example—that everyone has to take to cross the retirement finish line. Workers who want to retire in their 50s, however, face challenges that their peers who stay on the job until age 65 or later do not. How can you clear the hurdles that stand between you and an early escape from the rat race?

Social Security benefits don't become available until age 62; the Social Security Administration considers that "early" and reduces your monthly benefits accordingly. Withdrawals from IRAs (individual retirement accounts), 401(k) plans, and other retirement plans before age 59½ are, in most cases, subject to a 10% penalty.

So, how does a retiree younger than age 59½ make ends meet between the last day of work and the day he or she is old enough to draw on traditional sources of retirement income?

The most straightforward way to fund an early retirement is through savings accumulated in nonretirement accounts, which allow you to make withdrawals at any age without penalty. Michael Edelman of Huntington Woods, Mich., who recently retired at 53, says he's tapping a brokerage account he added to over the years in anticipation of an early retirement. He also maxed out his 403(b) contributions along the way.

For many, affordable medical insurance is enough of a stumbling block to delay retirement for years.

If you can't accumulate enough outside your retirement accounts, it is possible, under IRS (Internal Revenue Service) section 72(t), to tap into an IRA or pension before age 59½ and avoid the 10% penalty. The 10% penalty tax does not apply to distributions which are part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the individual or the joint lives or joint life expectancy of the individual and his designated beneficiary. The amount of the penalty-free withdrawals that you can take from your IRA varies considerably, depending on which of the three IRS-approved methods you use to calculate the withdrawals. The withdrawal calculation can be quite complex.

Employees who participate in a 401(k) or similar plan can take penalty-free distributions before age 59½ if they are at least 55 when they terminate their employment with the sponsoring company—or turn 55 in the same calendar year. Plan rules may pre-empt the federal rule, so check with the plan administrator before counting on this as an option.

There's also the possibility for homeowners with substantial equity to fund the early years of retirement with the windfall from selling their property. Robert Clyatt, author of "Work Less, Live More: The New Way to Retire Early," estimates that millions of home sellers could generate at least $600,000, which he says is the minimum needed for a comfortable semiretirement.

Pete Ronza, the compensation and benefits manager at University of St. Thomas in St. Paul, Minn., says that more than once he has had the unenviable duty of pointing out to an employee on the verge of early retirement that Medicare only kicks in at age 65. For many, that single issue was enough of a stumbling block to delay retirement for years.

Semiretirement is the latest trend among boomers.

If your former employer doesn't offer continuing medical insurance as part of your retirement package, you'll have to find an affordable solution before you quit.

Of course, you could elect COBRA (Consolidated Omnibus Budget Reconciliation Act) to continue your coverage under your employer's plan, but in most cases that lasts only 18 months and won't get you to Medicare age if you retire in your 50s.

Or, you could try to get onto your spouse's plan if he or she will continue working. The company may or may not pay a portion of your premium.

Dawn Kidd of Door County, Wis., didn't qualify for continuing health coverage when she retired from her job as a schoolteacher in June 2007, at age 57. She now gets partial coverage through a part-time job. In researching her options, Kidd, who has no pre-existing conditions, received quotes of $300 to $350 per month for a policy, but says she knows people with health issues who have had to pay $500 to $600 per month for coverage—if they could get it.

Edelman's solution? He took out a high-deductible policy through Blue Cross/Blue Shield and set up a health savings account, which enables him to pay out-of-pocket expenses with pretax dollars. Edelman found the rates for such policies to be "very affordable" for someone his age: The policy he chose has a $2,500 deductible and a 20% co-pay, up to a maximum of $2,500, and costs him $125 per month. In the worst-case scenario, that would cost $6,500 for the year. For those who are healthy, that worst-case scenario might not be any more expensive than the regular premium they would pay every year for a traditional "full-coverage" health plan.

Early retirement packs a one-two punch—more years of retirement to fund and fewer years to save for them. Experts such as Tom Bromm, a financial planner with Sagemark Consulting in San Ramon, Calif., say that reaching age 95 is no longer uncommon. So, while someone retiring at 65 may have 43 years of work during which to save for 30 years of retirement, someone retiring at 55 would have to fund 40 years of retirement on just 33 years of earnings.

Workers who want to retire in their 50s face challenges their older peers do not.

On top of that, both pension and Social Security checks may be smaller for the early retiree. Social Security benefits, for example, are based on the average of your highest-paying 35 years of work. If you work fewer than 35 years, those years of unemployment will bring down your average and permanently reduce your monthly benefits. (Use an online calculator to see how your benefits could be affected by an early retirement.)

To compensate for a shorter career and a longer retirement, some early retirees will have to make a choice: Adopt a different lifestyle or risk running out of money.

For Paul Terhorst, author of "Cashing in on the American Dream: How to Retire at 35", and his wife, Vicki, cutting expenses was the way to go. The couple sold their Los Angeles home and all the trappings and bought an apartment in Argentina for $20,000. Their low-cost lifestyle has enabled them to live off their investments since 1985.

There are many countries where you can live on far less than is needed to achieve a comparable standard of living in the U.S. If the life of an expatriate isn't for you but you'd still like to cut costs, visit Sperling's BestPlaces. The site allows you to compare the cost of living across the country. For example, according to the calculator, the lifestyle that costs $90,000 in San Francisco would cost less than half that—$36,842—in Hope, Ark.

While you're at it, take a look at how your tax burden would differ depending on your state of residence.

Semiretirement, as presented in Clyatt's book, is the latest trend among boomers who are ready to say good-bye to their full-time jobs but might not yet be in a position to live entirely off their savings.

Semiretirement can take many forms: reduced hours at your regular job, a part-time job doing something you love, or a new business. Whichever option appeals to you, plan ahead. Sites such as AARP's Careers after 50 and 2Young2Retire can help.

Early retirement packs a one-two punch—more years of retirement to fund and fewer years to save for them.

"The idea of retirement, for me, has never been to just sit and do nothing," says Kidd, who has already returned to work part time. Her original plan was to move to Door County and begin a second career selling real estate. When the housing bubble burst, she decided to make the move and return to teaching, part time, in her new hometown for a while instead. Not only is she enjoying herself, she's supplementing her pension income.

"I don't know how long I'll keep teaching," says Kidd. "It depends on how much fun it continues to be."

Regardless of how long Kidd keeps earning, her retirement portfolio will be healthier for it. And Kidd may be, too. Research has revealed that those who continue working at jobs they enjoy tend to maintain their well-being better than those who don't.

Published August 4, 2008

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