Retiring early sounds like the ultimate encore. You walk off the corporate stage at 50 or 55, the crowd goes nuts, and you throw your ID badge into the pit. SEE YA!
Then the house lights come on.
But then you realize most of your money is sitting behind a locked door with a sign that says “Come back at 59½.” haha!
I retired at 50, so I’ve been living in this gap for a while now. And recently, our ChooseFI meetup group here in Minnesota spent an entire meetup (and the following happy hour) on one question: How the heck do you fund the gap?
This meetup was full of people at all different stages in their retirement or personal finance journey. Some peeps in the room were already retired. Some were a year or two out. A few were still running the numbers and had a decade or more left. What came out of that night was so good I had to turn it into a post. I also went back and tried to double-check the rules afterward, because tax stuff changes faster than a drummer’s bar tab.
Let’s get into it.
What Is “The Gap,” Anyway?
The gap is the stretch of years between the day you stop working and the day the “normal” retirement stuff kicks in. There are really a few locks on the door:
- 59½: When you can pull from most retirement accounts without a 10% penalty.
- 62: The earliest you can start Social Security.
- 65: When Medicare starts.
Here’s the rude part. Those early retirement years are often your most expensive. You might still have kids at home or in college. You probably want to travel or hit that wild German Metal Festival like Wacken! You wanna do these things while your knees still work! lol Oh, and you’re on the hook for buying your own health insurance.
By the time you are a 70-year-old retiree and have Social Security coming in you’re most likely spending less. So early retirees need moremoney with less access to it. Kinda metal, honestly. Just not in a good way.
The Gap-Funding Toolkit
1. The Taxable Brokerage Account (The Workhorse)
So, here’s something I noticed. Almost everyone in the room who was actually retired was living mostly off a regular taxable brokerage account. Not wicked-fancy 72(t) plans. Not confusing Roth ladders. Just good old brokerage money.
Why? Cuz there’s no age rules. No penalties. And long-term capital gains get friendlier tax treatment. From what I found, for 2026, a married couple can have up to $98,900 of taxable income and still pay 0% federal tax on long-term gains. That’s after the $32,200 standard deduction comes off the top.
I’ve talked about this before: if you want to retire early, a brokerage account is your best friend. It does’t have to complicated. We can use index investing.
But one dude shared a lesson that stuck with me. In the beginning years of his early retirement, he sold the shares with the smallest gains first to keep his income low and qualify for bigger healthcare tax credits. A smart move at the time. But now discovered a problem. All the shares he has left now are totally loaded with gains. So every time he sells, his income spikes. And it gets harder to stay under the healthcare subsidy limits, and of course his insurance and healthcare costs continue to get pricier with age.
I think the lesson here is to optimize for the whole gap, not just this year.
2. Real Estate and Other Cash Flow
This one is for me. A big chunk of my gap funding comes from real estate cash flow. Having money come in every month means I don’t stress too much about which account I can crack open and when. I’ve started to move away from residential real estate and now am focusing more on commercial development and will be using this cashflow to primarily fund my gap years. I think the peace of mind of not having to stress about what account or where money is coming from and how to pay less tax, and avoid penalties is worth a lot.
Another dude did something creative. He made a private loan to a startup. The first year paid nothing, then it switched to steady monthly payments of interest plus principal for two years after. It works like a mini income stream. Just know the risk: a startup can default, and a Treasury can’t (well, let’s hope…gulp).
A working spouse, part-time gigs, or consulting also count here. Any income you don’t have to pull from investments makes the gap that much easier.
3. The Rule of 55
If you leave your job in or after the calendar year you turn 55, you can pull from that employer’s 401(k) or 403(b) without the 10% penalty. You still pay income tax. The IRS spells it out here.
A few things to consider came up:
- It only works for the plan at the job you just left. Not old 401(k)s. Not IRAs.
- Your employer’s plan has to allow it. Some plans only let you take one big lump sum, which could totally blow up your tax bill.
- Qualified public safety workers can get in even earlier, at 50 or after 25 years of service.
One woman is using a wicked-clever twist. She took a short part-time job at a big company whose 401(k) lets you join right away and accepts roll-ins. She plans to roll her old 401(k) into that plan, then leave after turning 55! Can this work? I mean in theory. But this totally calls for a “read the plan document and call the administrator” move! lol
4. Governmental 457(b) Plans
If you work for a state or local government, and have money in a governmental 457(b) can come out after you leave that job with no 10% penalty, at any age. Obviously, taxes still apply.
Remember, if you were to roll that money into an IRA, you lose the special access. Leave it where it is.
5. Roth IRA Contributions (Your Secret Stash)
The money you contributed to a Roth IRA can come out any time, tax-free and penalty-free. Just not the growth, at least not without taxes and penalties.
It’s a good idea to do this reality check, If you were to have maxed out your Roth IRA every year for the last 20 years, you’d have put in about $110,000. Which is f’n awesome! But keep in mind it won’t carry you through an early retirement by itself. The 2026 limit is $7,500 (plus $1,100 if you’re 50 or older).
Think of it as sort of a gap-filler. If you need an extra $10K this year but don’t want to jump into a higher tax bracket or lose your healthcare credits? That’s when the Roth stash can come to save you!
6. The Roth Conversion Ladder
I know this one gets talked about a lot. Here’s how it works in plain English:
You move money from a traditional IRA into a Roth IRA and pay the income tax that year. Each of these conversions has its own five-year waiting period before you can pull it out penalty-free. Remember, the clock starts January 1 of the year you make the conversion. So a conversion done in December gets you a nice head start. Just don’t miss December 31, because there’s no “counting it for last year” like there is with contributions.
The little trick here is that you need about five years of money from somewhere else first. One family at the meetup plans to live off their brokerage account for six or seven years while their ladder builds up.
Also, try to pay the conversion taxes with outside cash, not money from the IRA itself. If you’re under 59½, any tax withheld from the conversion counts as an early withdrawal and can get hit with the 10% penalty. Ouch.
And keep an eye on your income. Every dollar you convert counts as income that year, which can shrink your healthcare credits. Convert enough to make progress, but not so much that you fall off the subsidy cliff.
7. The 72(t) Plan (SEPP)
Substantially Equal Periodic Payments. Say that five times fast lol! This one was really new to me.
So what a 72(t) lets you do, is take specific payments from an IRA before 59½ with no penalty. But here’s the catch, you have to keep taking the exact same payment for five years OR until you hit 59½, whichever is longer. If you start at 50, you’d be locked in for almost 10 years!
The good news here is the IRS raised the interest rate floor to 5% a few years back, which made payments bigger. Michael Kitces ran the numbers and a 50-year-old with $1 million could take a bit over $63,000 a year for 10 years. So for example if you want, let’s say, $50,000 a year, you’ll need roughly $800,000 in that IRA.
This is some more of what I learned about this
- A 72(t) works per account. So split your IRA and only set it up on the piece you need.
- Break the rules (take too much, too little, or add money) and the IRS can hit all your past withdrawals with the penalty plus interest. Brutal.
- If the market tanks, you get a one-time switch to the smaller RMD method.
Want to go deeper? ChooseFI Episode 475 with Sean Mullaney walks through all of this.
8. The HSA Shoebox
I’ve talked about how awesome the HSA is. Another strategy is to pay your medical bills out of pocket now. Let your HSA keep growing and growing. Then, later, you reimburse yourself for those old expenses, tax-free, as long as they happened after you opened the HSA.
This was, like one of the best tips of the night: you actually don’t need a shoebox full of faded receipts! I mean, it’s 2026, so I scan all my receipts with my phone. But anyway, you can ask your pharmacy or chiropractor for a yearly printout of everything you paid. Boom! Done.
9. Just Pay the Penalty (Seriously)
Okay, nobody likes it, but let’s do the math. Say you pull $50,000 a year from age 55 to 60. The 10% penalty is $5,000 a year, so about $25,000 total. That’s, like, real money! But, yeah know what? It’s also not the end of the world. So let’s look at maybe hybrid approach? We could set up a 72(t) for $35K and cover the rest another way.
10. Borrowing (Handle With Care)
This kinda surprised me. There was a person that was planning on using a home equity line of credit to bridge the next year and a half. I guess it can totally work short term. But if you’ve read my story about what “low monthly payments” really cost you, you know interest has a way of sneaking up on you lol! Have an exit plan.
Build a Bridge With Bonds, CDs, or Treasuries
There also was a wicked-slick idea from the meetup. Your spending often drops once Social Security and Medicare show up. So you could split your needs in two:
- The money you need forever (your 4% rule money)
- The extra money you only need until Social Security starts
That extra chunk of change could come from a bond ladder. This is done by buying Treasuries or CDs that mature in the exact years you need the cash. You can buy Treasuries at auction through your brokerage or TreasuryDirect. There’s a bonus for us Minnesotans! Treasury interest isn’t taxed by the state.
If you don’t want to buy individual bonds? You could buy ETFs! Defined maturity ETFs like iShares iBonds hold a basket of bonds that all mature in the same year. It’s kinda like a ladder in a box! I didn’t realize though, we need to watch out for callable bonds (I guess even some government agency bonds do this). If rates drop suddenly, the issuer of the bond can pay you back early, and you totally lose that sweet rate of return you locked in. LAME!
Healthcare: The Final Boss
Practically everybody in the room agreed on this one. Healthcare wrecks early retirement projections.
And 2026 made it worse. The enhanced ACA subsidies expired at the end of 2025, and what was called the “subsidy cliff” is back. Go even $1 over 400% of the federal poverty level and you lose all your health care premium credits! For 2026 coverage, that 4x poverty level line sits around $62,600 for a single person and $128,600 for a family of four.
This is why managing your income in the gap years matters so much. Every account choice above changes your income, and your income decides your healthcare bill.
I do wanna just mention to remember that health care sharing ministries: they are not insurance. They don’t guarantee payment and often have caps. The room heard a story about a family whose newborn’s hospital bills blew way past their plan’s limit. YIKES! Know what you’re buying.
And if you’re thinking about moving to a no-income-tax state, it takes more than a mailbox and a new driver’s license. There was a discussion about how states will look at where you REALLY live. Andy Panko’s Retirement Planning Education podcast has a solid episode on residency and domicile.
How Much Cash Should You Keep?
So a big question was, “How much cash should you keep?” and “What do you count AS actual cash?” The answers in the room ranged from one to two years of basic expenses, up to about 5% of the portfolio. I kinda like how one woman attendee uses a three-tier budget: needs, earned adventures, and luxuries. Keep your needs covered in cash for a couple of years. If the market crashes, you trim the fun stuff and ride it out! My favorite definition of cash from the night: if you can have it in your hand within a day or two without a penalty, it’s cash. I tend to agree with this one.
Your Gap Plan Is a Setlist, Not a Solo
Here’s my big takeaway from all of this. Nobody at that meetup was using just one strategy. The peeps who felt the calmest were mixing a few:
- Brokerage money for the early years
- Cash flow from real estate, a spouse, or side gigs
- A Rule of 55 or 457(b) if they had one
- Roth contributions to smooth out high-income years
- A 72(t) or Roth ladder for later
- A cash buffer so a bad market doesn’t force bad decisions
There is no perfect answer. You make your best guess, adjust as you go, and keep your entire lifetime tax bill in mind, not just this April. If you’re still figuring out what kind of retirement you even want, check out my post on the different paths to FI. Your “why” shapes the whole plan.
Early retirement isn’t about getting every number right. It’s about building enough flexibility that you can handle whatever the setlist throws at you. Horns up my friends and ROCK ON!
This post is for education and entertainment. I’m not a financial advisor or tax pro. Talk to one before making big moves with your retirement accounts. \m/ \m/