Much is written on the “accumulation phase” of retirement planning — the period of time you are gainfully employed and contributing to your 401k plan and other retirement savings accounts. Much less is written about the “decumulation phase,” or the time after you have retired and need to take withdrawals from these savings.

Even more, almost nothing is said about taking withdrawals prior to age 59½, since avoiding the 10% surtax on “premature withdrawals” is enough to discourage all but the desperate from incurring this additional levy. However, there are situations where starting withdrawals while still in your 50’s is unavoidable due to personal circumstances.

While delaying withdrawals from your retirement accounts as long as possible is one the best way to minimize the risk of outliving your savings, if done correctly you can at least avoid the 10% early withdrawal penalty via a little-known strategy referred to as “Substantially Equal Periodic Payments,” as provided for in IRS Code Section 72(t)(1).

Here’s how it works: At any age before 59½ you may elect to begin taking withdrawals from an Individual Retirement Account, but once you start taking withdrawals under this program you must stick with it for the greater of either 5 years or until reaching age 59½. For example, if you are 50 years old when it starts, then you must stick with it for 9 ½ years, but if you are 55 when it begins then you need only meet the 5-year minimum since you would be beyond age 59½ by then.

Although most people employing this technique choose to receive income monthly, you have the choice of getting it quarterly or annually so long as you stick with that schedule until the meeting the term limit as described above.

The amount of the distribution must be determined according to one of three methods: (1) “required distribution”, (2) “amortization”, or (3) “annuitization”.  I won’t get into the details of exactly how each of these calculations is performed here, but suffice to say that they each determine a distribution amount based on life expectancy and an assumed interest rate.

Until a few years ago you were stuck with that amount and frequency for the remainder of the term without exception, but that rule has since been relaxed to allow for a one-time change from either the amortization or annuitization method to the required minimum distribution method. In other words, you can decrease the amount of the payment (since the required minimum distribution method results in the lowest payment), but you cannot increase it.

And don’t worry; you don’t need to know how to figure out how to do all this on your own. Just about all the major mutual fund companies will make these calculations for you. They will also set up an automatic withdrawal plan in that amount from your investment account, withhold federal income taxes for you, and then direct deposit the net withdrawal directly into your bank account.

It may be easier to understand with a simple illustration. Tom just took an early retirement package from his longtime employer at age 53 and has accumulated $500,000 in his 401(k) plan account. He is going to continue to work part-time, but needs a little more money to make ends meet so he transfers his 401k balance into a self-directed IRA with a mutual fund company.

The fund company then performs all three calculations based on Tom’s age (or Tom and his spouse’s age if he elects that choice) and an assumed interest rate. Under the IRS rules the interest rate assumption can be up to 120% of the current “federal mid-term rate” for either of the two months prior to the commencement of distributions. This rate is published monthly by the IRS.

The federal mid-term monthly distribution rate for June 2014 was 3.1%, so 120% of that amount would result in a maximum interest rate assumption of 3.7%. In addition to the interest rate assumption, you also get to withdraw an amount based on your remaining life expectancy.  Since Tom is 53 years, his remaining life expectancy is 31.4 years per the Single Life Table used by the IRS for this purpose.

Now Tom has to choose one of three amounts based on the methodology used. The required minimum distribution method results in an annual payment of $15,924, the fixed amortization method will pay $25,139 and the fixed annuitization method comes to $25,029 (as a general rule the fixed amortization and fixed annuitization methods generate a very similar result, while the minimum distribution method is substantially less).

So now Tom knows what his choices are, and begins taking distributions under the fixed annuitization method of just over $25,000. However, two years later he decides to go back to work full-time and no longer needs as much income from his retirement savings so he elects to utilize the one-time switch to the lower payment under the minimum distribution method.  He is still only 55 years old at this point so must continue with this payment until age 59 ½ (since he was only 53 when he began taking withdrawals; the clock does not start over when you make the switch) and cannot change it again.

Although taking withdrawals under this program avoids the 10% early withdrawal tax, it is still treated as ordinary income and subject to any federal, state and local income taxes that may apply. However, it is not subject to FICA withholdings since it is not considered earned income.

Of course, a dollar taken out of a retirement account today is one less dollar (plus future interest) available to you in the future, so you need to be careful about taking withdrawals before the normal retirement age. But sometimes life throws you a curveball, in which case having access to some of the money via this program is the least expensive way to supplement your income.