u/bridgeandretire

I’ve been digging into 72(t) SEPP withdrawals (a method to access pre-tax funds before 59.5) and one thing that stands out is how rigid withdrawals can be and how you have to get the math correct or face substantial penalties. 

That said, there's a “partial escape hatch” that I don't see discussed very often. The IRS allows a one-time switch from the amortization (or annuitization) method to the RMD method during your SEPP schedule.

Here’s a simplified example:

You start a 72(t) at age 45. You isolate $1.5M of your pre-tax accounts into a separate IRA, use a 5% interest rate, and set up a fixed amortization schedule. That produces an annual fixed withdrawal of $86,733.

Everything is fine until age 50, when your parent passes away. You inherit an IRA subject to the 10-year rule but where you’re also required to take RMDs. It’s sad that Mom or Dad passed, and it also throws a wrench in your income and tax planning. 

However, because of the one-time method switch rule, you could move from the amortization method to the RMD method for your SEPP. That would reduce your 72(t) withdrawal to ~$41,000 in that year, and you could then draw additional income from the inherited IRA as needed.

Another cautionary example I’ve heard financial advisors bring up is someone who retires early and then later decides to go back to work. That’s a more benign version of the same idea: your income needs can change after you’ve already locked in a 72(t).

It’s not a “get out of jail free” card, and it only works once (and in one direction), but it does add some flexibility in a system that otherwise has very little.

I’ve made two prior posts about healthcare costs and I’ve gotten some good feedback, so I’ll tempt Reddit fate with one more about planning for healthcare inflation.

Early retirees worry a lot about inflation. And especially about healthcare inflation since it is likely to the the #1 cost in retirement, and premiums have been rising fast. However, if your income is under 400% of the Federal Poverty Level, budgeting for healthcare premiums in early retirement is surprisingly straightforward. Just plan for 9.96% of your household AGI (or less). For a couple at the top end of current limits, that means premiums of about $8,400 a year.

Here’s an example for a couple at 399% FPL using ACA Silver benchmark Marketplace plans from my area:

Note that your expected contribution stays the same as you age. Even though nominal premiums rise, the ACA’s premium tax credit automatically adjusts, so your premium remains stable. MAGI limits and ACA subsidies are also indexed for inflation, so your expected contribution stays roughly the same year to year. Yes, of course, this assumes the ACA stays in place. These estimates assume a silver plan, so you’ll have cheaper bronze plans and more expensive gold plans to choose from.

If you’re not planning on subsidies, or your income is above 400% FPL, you can still make some estimates. Look online, pick the age you’re retiring (like 50), take the premium rate, and inflate it by at least 8% per year (roughly 4% age-graded increase + 4% healthcare inflation). For example, if the premium at 50 is ~$20,000/year, I think your budget should allow for 20,000×1.08¹⁴ ≈ $57,500 by the time you’re 64. Without the subsidies to insulate you, that is obviously a substantial number to plan for.

I know the general withdrawal sequence has people exhausting their taxable accounts first and saving Roth for last, but I think people might hedge a bit to ensure they have ways to carefully manage their MAGI in the final years before they are on Medicare, because that's when income management will matter the most.