What is this? How come I have never heard of it before? Maybe because it has a lot of rules, most of which are mant to keep you from doing this. For example, once you start using the distributions you can't turn them off until 5 years have passed or you reach the age of fifty nine and a half, whichever is longer. So if you start using the distributions at 58 you have to continue to use them until 63, no matter what.
Why would anyone want to do this? Well, I can see two possibilities reasons. One, the person becomes disabled and wants to boost their income by using the 401k money sooner rather than waiting. Two, the person is trying to retire early and this is one method of accessing the 401k money.
So let's say I become disabled tomorrow. Don't scoff, I drive a lot for my job and anything can happen. After I get home and discover I can no longer work I decide to use my 401k to cover my expenses, forever. This decision can't be taken lightly, because you basically can't turn it off, and it will slowly drain away your 401k until there is nothing left. If I put my information into the calculator here I get
-- $98K, the average amount of money americans have in their retirement accounts
-- Interest rate 0, for the minimum distributions.
-- Life expectancy, I am 42 now and plan on living until 78, the average life expectancy for a woman. That would be 36 years.
And calculated using the IRS guidelines, the amount comes out to be... $2,722.22. Underwhelming to say the least.
But two thousand dollars is more than enough money to pay the property taxes, and the remainder would be a good amount to save every year to cover costs of home repair. It's not nothing. It could prevent someone from being homeless. And as a survivalist, I feel like this is pretty cool information to have.
One kind of excellent lifehack for this idea would be to have several 401ks or IRAs and use the SEPP on just one of them. That would let you have your most basic expenses covered by the 401k that the SEPP is attached to, and the other 401k is the one you will use for discretionary spending say at the age of fifty nine and a half. You could even roll your 401k over into two or three tradional IRAs, with one of them paying out the SEPP to cover your housing and utilities and food forever, allowing you to retire early, or at least fee confident that you could if you wanted to do so.
What are your annual expenses, and what would you have to have in savings to achieve them? This is a great question, and it's individual for everyone. Assuming I have no car and bike or bus everywhere I need to go, also assuming I'm not paying for all the children's costs, mine would be, let's see, $1300 for property tax, $600 for phone, $900 for electric, $600 for water and sewer, $4800 for health insurance, guessing $2400 for food. That comes out to $10,600 with no car. Much less than most people I am assuming.
Putting that into the calculator you would get
$384,000.00 needed for early retirement.
Kind of sobering numbers. Something to think about.