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Here's What Happens When You Retire, By Age

According to recently published research, an increasing number of Americans aspire to retire early (some very early in fact). In 2020, 18% of survey respondents set their target retirement age at 59, which was a significant increase from prior years. If you have an early exit from the workforce planned, what should you keep in mind?

If you retire before you are 59 ½ years old…

  • You generally cannot access your savings in your IRA or workplace retirement account (401(k), 403(b), etc.), without penalty. Have you saved enough in “regular” investment accounts to meet all of your living expenses until you are 59 ½? Remember, you are now unemployed! 
  • There are a couple limited exceptions to the penalty rule above. One, if you are at least 55 years old and leave your job (voluntarily or not), you can withdraw from your workplace retirement account at that employer without penalty. Two, IRS Rule 72-t allows for “substantially equal” annual penalty-free distributions at any age from a retirement account over at least a 5 year period, concluding by the age of 59 1/2. If you withdraw money from your retirement account early, is there enough remaining to support you for your entire lifetime?
  • You may need to buy health insurance on the open market. Alternatively, you may be able to continue your workplace health insurance plan, but paying the full amount of the monthly premium. Either way, health insurance is likely to be your most significant non-housing expense.
  • You cannot access your Social Security benefit.

If you retire after age 59 ½ but before you are 62 years old…

  • Now you are able to take withdrawals (distributions) from your retirement accounts, without penalty. Have you calculated what a “safe” amount is that you can withdraw each year without risking running out of money?
  • You will still need to pay for health insurance.
  • You still cannot access your Social Security benefit.

If you retire after age 62 but before you are 65 years old…

  • You can now access your Social Security benefit, but at a very reduced amount. Bear in mind that this reduction is permanent. Is this sufficient for your needs not just now, but in the future? If you are married, what effect will this have on your spouse’s standard of living if you die first?
  • You will still need to pay for health insurance.

If you retire after you are 65, but before your Social Security full retirement age...

  • Your Social Security full retirement age will vary with the year of your birth. Currently, for people born in 1960 or later, full retirement age is 67. So while your benefit will be higher now than it was at age 62, it will still be well below its highest point.
  • The good news is that you are now eligible for Medicare. But be warned! Medicare does not cover everything. Research tells us that the average person will experience $150,000 in out-of-pocket medical costs in retirement ($300,000 for a couple). And this does not include long term care costs. Have you saved enough to meet the cost of  healthcare as you await your Social Security benefit?

If you retire at your Social Security full retirement age...

  • You can now access a larger (although not the largest) Social Security benefit. For many people, this is the moment that they say “Peace out” to their co-workers, and turn their attention to other life pursuits. Have you sufficiently prepared for the non-financial aspects of retirement? Do you know how you will spend your time?

If you retire at age 70 or later...

  • At age 70, you can now access the largest possible Social Security benefit. For every year that you delay taking your benefit after your full retirement age, it will grow by about 8% annually until you are 70 years old. This could be a very significant feature of your retirement planning, particularly if you are married and are weighing the sometimes complicated decision of which spouse takes Social Security when. 
  • At age 72, you will now be required to take Required Minimum Distributions (RMDs) from your traditional IRA and any 401(k) accounts. (There is no RMD from a Roth IRA.) Depending on your savings, this may come with significant income tax implications as these RMDs will increase your ordinary taxable income.