Timing Your Retirement


When you choose to retire often depends on when you can access your retirement funds and benefits.

The idea that you retire at 65 may be common knowledge, but it’s no longer common practice. In fact, 40% of US workers retire before they’re 60, and another 27% by the time they’re 64. At the same time, you probably know a number of people who work full-time well into their 70s.

Regardless of what your strategy is, retirement planning doesn’t revolve around a specific age. It pays to know the types of benefits you may be eligible for at different ages, and to weigh the benefits and risks of taking them at particular times.


YOUR RETIREMENT TIMELINE

If you retire anytime after you turn 55, you may begin withdrawing from your 401(k) or similar plan without owing a federal 10% penalty on early withdrawals. Your employer may also begin paying your pension at that age if you are eligible for one. However, you don’t qualify for Medicare yet, so you must make your own health insurance arrangements if you are not covered by your former employer’s plan.

At 59 1/2, you may begin taking money from your tax-deferred and tax-free retirement savings plans without owing a 10% penalty, and you can take as much or as little as you choose. However, your employer’s plan will not allow withdrawals if you’re still working for the company.

If your spouse has died by the time you are 60, you’re eligible for retirement benefits from Social Security based on his or her contributions. If you’re still working, or you qualify for benefits based on your own contributions, you should get in touch with the Social Security Administration (SSA) and your financial adviser to see which payment option works best for you.

62 is the earliest age you qualify to receive Social Security income based on your own contributions. You are entitled to a percentage of the benefit you would receive at your full retirement age. For example, if you were born between 1943 and 1954, you get 75% of the full retirement benefit. If you work and earn more than the annual limit set by Congress, some of your Social Security benefits will be withheld.

Though it’s not always the official start of retirement, 65 remains a key age for several important benefits. It’s the first time you’re eligible for Medicare Parts A and B and Part D prescription drug plan. (To receive benefits by the time you turn 65, apply for them three months before your birthday.) At this age, you may also be entitled to take a higher standard deduction on your tax return. And, as a senior citizen, you may qualify for a number of discounts on things like transit passes and entry fees.

If you were born between 1943 and 1954, you reach full retirement age at 66. That means you qualify for your full Social Security benefit and can earn any amount from continued employment without losing a portion of that benefit. To begin receiving payments, you need to apply to the SSA. Allow three months from the time you apply before the payments begin to arrive.

There’s no point in further postponing Social Security income past 70, since the annual credits you receive for delaying payment are capped at that age. The base benefit you qualify for at this age is the most it can be.

For the year you turn 70 1/2, you must make your first required withdrawal from your 401(k), any traditional IRAs (including rollover IRAs), and any annuities you have purchased with tax-deferred income. The only exception — for 401(k)s but not IRAs or annuities — is if you’re still working.

After 70 1/2, you can’t make any additional contributions to a traditional IRA, though you can put earned income into a Roth IRA if you qualify, based on your adjusted gross income.

If you contributed to a 403(b) before 1986, you may be able to postpone withdrawals of those amounts until you’re 75. Check with your plan administrator and your financial adviser to see what’s possible.


SOCIAL SECURITY, SOONER OR LATER

Should you start to get income from Social Security at 62? The answer is usually yes — provided you’re retired — because for about 12 years you’ll be ahead of the game. For example, if your full benefit was $18,000, you’d get $13,500 (or 75%) at 62. When you reached 74, you would have collected $162,000 before cost-of-living increases — exactly the same amount as if you’d begun collecting at 66. But from that age on, having waited pays off.

Should you wait until you’re 70 to start collecting? In most cases, especially because the limit on penalty-free earnings has been eliminated for people over full retirement age, the answer may be no. If you qualified for $18,000 a year at 66, you’d get $24,490 if you waited until 70. But you’ll need to live to age 84 for delaying your payments to pay off. That’s because at that point you would have collected $326,724 (before increases for inflation) if you’d begun at 66 and $342,860 if you’d started at 70.

Obviously the longer you live, the more waiting pays. But your life span is hard to predict. A more compelling reason to wait until 70 may be if you continue to work, since up to 85% of your Social Security benefit could be subject to income tax.


AN EARLY (RETIREMENT) WARNING

Early retirement can put a strain on your long-term financial security. To begin with, if your surviving spouse will be dependent on your Social Security as a primary source of income, the reduced payment can prove a serious handicap over the long term.

In addition, many defined benefit pensions reduce the amount you collect if you’re younger than 65 when you retire. If that income is paid over 30 or 40 years, even a small annual reduction can add up to a lot of money. For example, a 15% reduction on an $18,000 pension would be $2,700 a year, or $81,000 over a 31-year retirement.

And keep in mind that when you stop earning income, you can’t make additional contributions to your 401(k) or IRA. If you’ve been adding $5,000 a year to your IRA and retire five years early, you’ll put aside $25,000 less. That reduces the principal on which tax-deferred earnings may accumulate.

None of this means you shouldn’t retire when you please. But a smaller income over potentially long periods is an important consideration as you make decisions about what benefits to start collecting at what points.