As you begin to imagine life without a day job, you may wonder if your age matters when it comes to picking a retirement date. You’ve probably heard numbers tossed around, so how important are those numbers, and when is your ideal retirement age? You can retire whenever you feel like it, but several milestones affect when you can avoid tax penalties or qualify for retirement income benefits.
Ultimately, the question becomes whether or not you can afford to retire at a particular age, given your resources and needs.
Social Security Retirement Age
When most people about retirement ages, they want to know when they can start taking retirement income from Social Security. They’ve paid into the system for their entire working lives, and they’re looking for the reward. The age at which you qualify for Social Security benefits depends on when you were born, and a few other factors.
The early retirement age for Social Security benefits is 62. That means you can start collecting payments at age 62, but your payments will be smaller than they’d be if you wait until your “normal retirement age” or “full retirement age.” Starting early seems appealing because you get paid earlier—but those payments will be reduced for the rest of your life (and your spouse, if any, might be affected by the decision to take reduced benefits). Still, if you and your spouse are in poor health and not planning to live to an old age, it can make sense to start at 62. Immediate cash flow needs could also make it worthwhile to claim early.
Widows and widowers can start taking reduced benefits as early as age 60 (or age 50, if they’re disabled and meet specific criteria).
The normal retirement age, which sets you up for full Social Security benefits, depends on when you were born:
- 1937 or earlier – age 65
- 1938 to 1959 – between age 65 and 67 (see Social Security’s Full Retirement Age for details)
- 1960 or later – age 67
Do you have to take benefits once you reach the retirement age? No, you can continue working or living off of other assets, if you like.
To maximize your Social Security benefits, it may pay to wait. For every year you delay after the normal retirement age, you can potentially increase your income by 8% per year (but those delayed credits end once you reach age 70).
Seem complicated? It is. If you’re getting ready to take benefits or you’re trying to figure out how much you’ll receive, contact the Social Security Administration for details, and review all of your options carefully. Speak with a fee-only financial planner to get advice that fits with your finances.
Retirement Accounts: IRA, 401(k), 403(b), & More
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Another way to think about your retirement age is to look at when you can spend money from retirement accounts without paying tax penalties. Again, there are dozens of complicated rules and exceptions to each rule, but we can cover the topic at a high level here.
For individual retirement accounts (IRAs), including traditional and Roth IRAs, you might consider the retirement age to be 59.5. After that time, you can pull money out of a traditional or rollover IRA without an early withdrawal penalty. However, things get a little bit more complicated with other types of retirement accounts. By the way, you can withdraw funds before then—without penalty—in several ways, but let’s stick to the basics.
Roth IRAs generally require that you hold assets in a Roth account for at least five years (in addition to being age 59.5) to avoid tax penalties. However, that rule doesn’t apply to normal, annual contributions you make—you can take those contribution dollars back out at any time (with no taxes and no penalties), but check with your CPA and financial advisor before counting on that. Other types of money, including Roth conversions or earnings on your contributions, may be penalized unless you follow specific five-year holding rules.
401(k), 403(b), and other qualified plans also use 59.5 as a retirement age to avoid paying tax penalties. However, your plan might have another “retirement age” that means something else entirely (for example, once you reach that age you are allowed to take money out, even though you continue to work at the company). As you can imagine, things start getting confusing when there are multiple retirement ages to keep track of. These plans also allow you to take money out without penalty if you retire or leave the company during or after the year in which you reach age 55 (but it doesn’t work to leave at age 53 and wait a few years).
Numerous exceptions exist. If you absolutely need to spend money earlier, you might be able to avoid penalty taxes if you meet certain criteria (such as death, disability, an IRS approved payout schedule, and others). Research the type of account you have, learn about the exceptions, and double-check with a tax expert before taking money out. Just a few examples include:
- 457 plans might allow for withdrawals with no early-withdrawal penalty
- Retired public safety workers (firefighters, law enforcement, EMS, for example) may be able to withdraw funds early, as well
Learning all of these rules and investigating opportunities can potentially help you retire a few years earlier.
Your Job’s Retirement Age
Depending on what you do for a living, you might qualify for retirement benefits when you reach a certain age—or a combination of age plus years of employment. For example, you might reach a “Golden 80” when you are 60 years old and you’ve worked for 20 years. If you’re in this position, you’re one of the fortunate few who still benefits from a pension plan.
Every employer is different, so you need to speak with your human resources department to find out what the retirement age is at your place of work (a financial planner like me can coach you on those calls or dial-in with you). As you research this, you may want to inquire if there is any way to retire at an earlier age. Sometimes you can “purchase” credits or years of service to get you to the magical number needed to retire. If you have the resources and don’t feel like continuing to work, that might be an attractive option.
If you get healthcare from your employer, it’s also important to know about potential retiree health insurance options. Paying for healthcare costs after retirement may be surprisingly expensive, and you need to explore all of the alternatives.
When Do Most People Retire?
It depends on who you ask. In the U.S., women tend to retire around age 63, while men retire around age 65. According to the Employee Benefit Research Institute (EBRI), the median retirement age is 62 (although most people think they’ll work until 65). These sources, and others, suggest that the average retirement age is in the low 60s.
Unwelcome Early Retirement
As you plan for retirement, remember that you might not make it to your ideal retirement age or your retirement savings goal. Many workers (40%, according to EBRI) are forced to quit early for a number of reasons: health issues (their own or a loved one’s), an employer going out of business, or a lack of work for their particular skill set. It’s hard for anybody to recover from these events financially, and it’s especially difficult for older workers who are nearing retirement. They may never re-enter the workforce.
Be ready for the possibility of a retirement that comes earlier than expected. That might mean saving a little bit extra, keeping an open mind about working part-time in a field completely unrelated to your current career, or having the flexibility to adjust your standard of living if things don’t work out the way you hope.
Important Information
Please do not rely solely on this article to decide when to retire. This is general educational content written for a broad audience—not you in particular. Every situation is different, things change over time, and this article might not be accurate or applicable to your individual circumstances. Read through all materials from your retirement account providers and employers, ask questions, and educate yourself on what you have available to you. Review everything with a CPA or tax expert before making decisions or taking actions. This is not tax advice, and this page may contain inaccurate, outdated, or not-as-detailed-as-you-need information.
Justin Pritchard, CFP® is a fee-only financial advisor. Based in Montrose, CO, Justin works with clients remotely, regardless of location (where not prohibited), providing financial planning, investment advice, and help with small business retirement plans. He has been quoted in the Wall Street Journal, Forbes, US News and World Report, and more. Learn more about Justin and let him know what’s on your mind!
