Microsoft’s Rule of 55 and Early Retirement
For employees hoping to retire early, Microsoft’s “rule of 55” offers some major benefits. This rule lets long-term employees keep vesting their unvested stock awards even after leaving the company. This can be a game-changer for your retirement income, especially when paired with smart 401(k) withdrawals.
What Is the Rule of 55?
Microsoft’s rule of 55 (also known as the 55 and 15 rule) applies to employees who:
Are at least 55 years old, AND
Have worked at Microsoft for at least 15 years
If you meet these conditions when you retire, you won’t forfeit all your unvested stock awards. Instead, any stock grants that are at least one year old will continue to vest on schedule — just like they would if you were still working.
This can make early retirement more practical by keeping a steady flow of stock vesting for years after you leave.
How Does The Rule of 55 Benefit You?
The rule of 55 helps Microsoft retirees in a few big ways:
Ongoing income: Since your restricted stock awards (RSUs) keep vesting, you get a steady stream of stock even after leaving Microsoft.
Less financial pressure: With stock awards still coming in, you may not need to dip into your retirement accounts right away.
More tax planning options: Instead of a big lump sum, your shares vest gradually, which can help you stay in a lower tax bracket.
Many retirees use their vested stock to cover early retirement expenses, giving their 401(k) and other investments more time to grow.
The Rule of 55 for 401(k) Withdrawals
The rule of 55 doesn’t just apply to your RSUs — it can also help with 401(k) withdrawals.
Normally, if you withdraw from a 401(k) before age 59½, you’d face a 10% early withdrawal penalty. But under the rule of 55, if you leave your job in or after the year you turn 55, you can withdraw from your 401(k) penalty-free. (Though you’ll still owe income tax on what you take out.)
This means you can use your vesting stock and 401(k) withdrawals to create a smooth, tax-efficient retirement income plan. Double the benefits!
Meet Clients Who Chose Retirement
From Boeing Engineer to world traveler, snowboarder, and mountain biker!
How to Make the Most of Microsoft’s Rule of 55
If you’re planning to retire early, the rule of 55 can be a powerful tool when used strategically. Here are some tips for a smooth transition into early retirement.
1. Review Your Stock Grants and Vesting Schedules
Not all RSUs will continue vesting after you leave — only those that are at least one year old. If you have recent grants that aren’t yet eligible, it may be worth delaying your retirement to ensure you don’t forfeit valuable stock. The difference of just a few months could mean thousands of dollars in additional equity.
2. Time Your Exit for Maximum Benefit
Microsoft typically issues stock grants on an annual cycle. If you retire too early in the year, you might miss out on a full year’s worth of stock vesting. On the other hand, leaving just after a major RSU grant or bonus payout allows you to take those earnings with you. With a little planning, you can walk away with a much larger payout.
3. Be Smart with 401(k) Withdrawals
While the Rule of 55 allows you to withdraw from your 401(k) without a penalty, that doesn’t mean you should start taking large distributions right away. Every dollar withdrawn is considered taxable income, and withdrawing too much in a single year can push you into a higher tax bracket.
Instead, consider taking only what you need to supplement your RSU vesting and other income sources. In the early years of retirement, your vested stock may provide enough cash flow to cover expenses, reducing the need for 401(k) withdrawals. By waiting until your RSUs taper off, you give your 401(k) more time to grow while keeping your taxable income as low as possible.
4. Consider Roth Conversions for Long-Term Tax Savings
If your taxable income is lower in the early years of retirement, you might benefit from converting some of your traditional 401(k) funds into a Roth IRA. Roth conversions allow you to pay taxes on your retirement savings now — when your tax rate is lower — instead of later when rates could be higher.
Once your money is in a Roth IRA, future withdrawals are tax-free. This strategy can be particularly effective for Microsoft employees who expect to receive Social Security and take larger 401(k) withdrawals later in retirement.
5. Plan for Health Insurance Costs
One of the biggest challenges of retiring before age 65 is finding affordable health insurance. Once you leave Microsoft, you’ll lose access to your employer-sponsored health plan unless you enroll in COBRA, which can be expensive. Some retirees opt for private health insurance or a spouse’s plan if available.
It’s important to factor these costs into your retirement budget. Health insurance premiums, deductibles, and out-of-pocket expenses can add up quickly. If you don’t plan ahead, you could end up withdrawing more from your retirement accounts than expected, leading to higher taxes and depleted savings.
6. Work With a Fiduciary Financial Advisor
A fiduciary financial advisor can help you avoid costly mistakes, like withdrawing too much from your 401(k) too soon or accidentally triggering a higher tax bill. They can also help you plan for healthcare, Social Security, and long-term investments so you’re set up for a smooth retirement.
Unlike traditional finance pros, fiduciary advisors are legally required to act in your best interest. That means they’re not selling financial products or earning commissions — they’re focused on helping you make the smartest financial decisions for your future.
Meet Clients Who Chose Retirement
Setting a retirement date isn’t easy, but it’s a lot easier with a Fiduciary and a plan.
Example Strategy for Early Retirement
Here’s how you could use the rule of 55 to structure your withdrawals and stock vesting in the first few years of retirement.
Step 1: Use Your RSU Vesting as Primary Income (Years 1–5)
Since your unvested RSUs continue to vest on their original schedule, treat these as your primary income source for the first few years. This allows you to delay tapping into your 401(k), taxable investment accounts, or Social Security, giving them more time to grow. (RSU vesting is considered ordinary income, so be mindful of how it affects your tax bracket.)
Step 2: Withdraw from Your 401(k) Only as Needed
The rule of 55 lets you take penalty-free withdrawals from your Microsoft 401(k), but you still owe income tax on what you take out. If your vested RSUs provide enough income, you may limit your 401(k) withdrawals to only what’s necessary for major expenses.
Step 3: Plan for Future Tax Efficiency (Years 5–10 and Beyond)
Once RSU vesting slows down or stops (typically within three to five years post-retirement), you may need to increase 401(k) withdrawals to replace that income. This is also a good time to consider Roth conversions — moving some of your 401(k) funds into a Roth IRA while you’re in a lower tax bracket.
Step 4: Factor in Social Security
Delaying Social Security past full retirement age (67 for most people) increases your monthly benefit. If your RSUs and 401(k) withdrawals cover your expenses, you may want to delay claiming Social Security to maximize your payments. For every year you delay past full retirement age, your benefit increases by about 8% per year until age 70. This can result in a significantly higher monthly check later in life when you may need it most.
This approach helps spread out taxes, keeps retirement savings growing longer, and ensures you’re maximizing your Microsoft benefits.
Want to Maximize Your Microsoft Retirement Benefits?
The rule of 55 is a great tool for Microsoft employees, but it’s just one piece of the retirement puzzle. Making the most of your RSUs, 401(k), stock options, and tax strategies takes careful planning.
At TrueWealth Financial Partners, we specialize in helping professionals like you optimize their finances for long-term success. Whether you’re considering early retirement or just want to ensure you’re making the most of your benefits, we’re here to help.
Ready to take control of your retirement strategy? Schedule a free consultation today and take the next step toward a financially secure future.
Meet Clients Who Chose Retirement
Retiring at 55 takes a special strategy.