Your retirement age: What’s the best time to stop working?
Have you ever wondered why age 65 is considered the "normal retirement age"? What if you plan to retire earlier—or later? Here’s how to time it just right.
Retirement rules: Why 65?
Age 65 has long been considered a typical retirement age, in part because of rules around Social Security benefits. In 1940, when the Social Security program began, workers could receive unreduced retirement benefits beginning at age 65.
From 1983 to 2000, the rules changed to gradually increase the Social Security full retirement age to 67. Currently, the Social Security full retirement age is 66 for those born between 1943 and 1959, and 67 for anyone born 1960 or later.
And the Social Security age requirement is not the only thing that's changed. In 1940, anyone retiring at age 65 would spend, on average, around a dozen years in retirement.
Today, because of improvements in health care, that number has increased—and will likely continue to increase. So it's important to factor this trend into your retirement plans.
Tip: Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.
Avoid outliving your money.
Whatever your age when you decide to retire, you don’t want to worry about outliving your money. Luckily, there are ways to help avoid it.
- Save more now. If you need to keep working because you won't have enough saved, take steps now to increase your savings. Contribute the maximum to your employer's retirement plan and to any individual retirement accounts (IRAs).
- Wait a little longer to collect Social Security benefits. For every year you wait past your full retirement age to elect benefits, you earn delayed retirement credits. The credits can increase your monthly benefit by about 8% per year, up to age 70.
- Limit your retirement spending. Many financial professionals recommend that you tap no more than 4% to 5% (adjusted annually for inflation) of your nest egg each year, to help make your money last.
His goal was always to retire early, not wait until 65.
Mark Timmerman, 59, retired two years ago. And he hasn’t looked back. It was a long-term goal he and his wife, Kelly, set when they married. With a solid plan in place, they took steps over time to achieve financial independence. Here’s what they did.
- Lived on a budget since they married nearly 30 years ago. (No fancy computer program. Timmerman just uses a plain ol’ Steno notebook.)
- Built five years’ worth of emergency savings to help weather unexpected life events or expenses in retirement.
- Lived below their means, avoiding “lifestyle creep.”
- Stayed invested, even during bear markets, and gradually increased their retirement savings.
- Saved for bigger expenses, like vacations, so they could pay cash and not rely on credit cards. They carried no debt into retirement.
“We didn’t have any big financial windfalls. Neither of us came from money. We were conservative in our spending, used common sense when it came to savings, and let the money work for us for a long time,” Timmerman says. “It sounds boring, but it just plain works.”
There are a few key ages to keep in mind as you get closer to retirement:
- Age 55: You may withdraw retirement plan savings without penalty if you leave your job or retire.
- Age 59½: You may withdraw money from qualified plans/IRAs without IRS penalty, as long as the plan allows.
- Age 62: The earliest age when you may begin collecting Social Security.
- Age 65: You become entitled to Medicare coverage.
- Ages 66–67: The Social Security full retirement age, depending on when you were born (see above).
- Age 70: The latest age to start receiving Social Security benefits.
- Age 72: You must start required minimum distributions (RMDs) from your retirement plans.1,2
Whenever you plan to retire, it's essential to create a strategy today. By reviewing your personal situation, a financial professional can help you set and work toward a target retirement age.
Ready to get started?
- Have a Principal retirement account from your employer? Log in to principal.com to access personalized planning, sign up for our quarterly newsletter and more. First time logging in? Get started here.
- Interested in starting an individual retirement account (IRA) or consolidating other accounts into your existing one? Call 800-247-8000, ext. 2503 between 7 a.m. and 9 p.m. CT. Not familiar with IRAs? Here’s a refresher.
- Got a financial professional? They can help you figure out your next steps. If you’d like to meet with one face-to-face, we’ll help you find one.
1 If a participant in a qualified retirement plan is still employed and not a greater than 5% owner, they are not required to start minimum distributions from that plan until they retire.
2 For the year 2020, taxpayers may have the option to not take an RMD from eligible retirement plans and IRAs. Subject to certain limited exceptions provided under the CARES Act.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
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