There are three ways that an early retiree can access his retirement funds without incurring a penalty before the age of 50 ½. These are the Fixed Amortization Method, the Fixed Annuitization Method and the Required Minimum Distribution Method. Each is unique and has specific conditions and consequences.
The fixed amortization method amortizes the account balance in the retiree’s plans over the remaining life expectancy with an interest rate that cannot exceed 120% of the federal mid-term rate. Life expectancy is based upon IRS tables printed regularly. Once the withdrawal amount has been calculated it cannot be altered. That may not seem like a problem but if your expenses change, it can be a real issue.
The advantage of the fixed amortization method is that it may produce higher payments than other methods but the calculations are complicated. Furthermore, the payments don’t adjust for cost of living increases so they may not keep up with inflation. Payments remain constant for the life of the annuitant.
In a period of relatively low inflation this isn’t a problem, but if inflation is high, the disbursements may not be enough for a retiree to maintain a standard of living.
Another caveat which should be noted is that under almost all circumstances, funds withdrawn from retirement accounts before the age of 59 ½ are hit with a 10% early withdrawal penalty. While retirees can opt to receive payments earlier than the cutoff date, there is a cost. Even if withdrawals are stopped the funds that have been disbursed will still be subject to all penalties.
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