What is a "Normal" Retirement Age?
“When do you want to retire?” is one of my favorite questions to ask clients, especially when I have a chance to ask it without much context or build up. I find that a lot of people romanticize the idea of retirement without giving much detail to the thought. Getting an understanding of when (and how) someone wants to retire has a lot of bearing on the interactions I have with them in their financial planning. For example, a blue collar worker who wants to retire from the trades early before their body gives out but is willing to spend a few hours a week on the payroll at Home Depot (sharing their knowledge and giving tips to do it yourself homeowners) plans for retirement very differently than a corporate executive who enjoys traveling abroad or wants to have a more philanthropic focus with their time and money. Or a school teacher who wants the next thirty years to feel more like a summer break that never ends. At any rate, I often get a response along the lines of “Well, when is a normal retirement age?”.
A “normal” retirement age can reference a number of different age-related milestones. Planning for retirement involves understanding how these milestones might affect your financial decisions and retirement strategies. These can impact when you can access retirement funds, what decisions you make with old retirement accounts, when you must take certain actions, and how to maximize your benefits. So here are some key age based milestones to consider when determining a “normal” retirement age.
Penalty-Free Withdrawals. Once you reach age 59½ (because the IRS likes to celebrate half birthdays), you can start withdrawing money from your retirement accounts, such as a 401(k) or IRA, without incurring the 10% early withdrawal penalty. This is a key component in managing your finances as you approach retirement, and taxes if you plan to retire before that age. There is an exception as it relates to your current employer’s 401(k) plan, where as long as you retire from the employer sponsoring the plan, you can draw as early as 55 with no penalty (1).
Social Security Full Retirement. Social security is a complicated program with a number of different age-based milestones. Let's start with what the Social Security Administration considers to be your “full retirement age.” There is a tiered schedule based on the year you were born that dictates this event. If you were born prior to 1955, your benefits are based on an age 66 retirement. If you were born between 1955 and 1959, the schedule then advances by two months each birth year (i.e., if you were born in 1955, your full retirement age would be 66 and 2 months, 1956 would be 66 and 4 months, and so on) (2). Finally, if you were born in or after 1960, your full retirement age is 67.
Social Security Early Retirement. Once you know your full retirement age, you can find your “primary insurance amount.” This is the baseline that the administration uses to calculate your retirement benefits. You do have the option of drawing your social security retirement benefits early, currently as early as 62; however, it will be at a reduced amount. There is another thing to keep in mind with early retirement if you plan to work, even part-time, after applying for social security. You will incur a penalty if you earn over a certain amount, and your benefits will be reduced (3). This problem goes away once you reach full retirement age.
Social Security Latest Delay Credit. In the same way retirement benefits are reduced by applying for Social Security early, you actually get additional credits for delaying your Social Security application. At age 70, however, you no longer get those delay credits applied to your benefit. Now, if this very brief overview of Social Security has intrigued you on more considerations to take when planning your social security, my colleague, Brandon, wrote an article going into even more detail on social security planning.
Medicare Enrollment. Turning 65 is a crucial milestone because it marks your eligibility for Medicare. It’s important to enroll in some part of Medicare during your initial enrollment period to avoid penalties and ensure you have health coverage. Some exceptions may apply if you are still working and your employer offers health coverage, but it is best to work with a health insurance professional who is an expert at navigating your Medicare options. Those conversations should start around three to six months before your 65th birthday.
Required Minimum Distributions. If you are saving into a tax deferred retirement plan, like a Traditional 401(k) or Traditional IRA, you are accumulating a pool of money that you have not paid taxes on… yet. While delaying those taxes can be beneficial, the IRS does not allow you to delay them into perpetuity. Eventually, you are forced to take withdrawals from these tax deferred accounts for the sole purpose of realizing the tax obligation. In 2019, this RMD age was changed from 70½ (there are those half birthdays again) to age 72, and more recently, it was changed again to age 73 with a schedule to push back to age 75 (4).
You can see that there is no simple answer to what a “normal” retirement age is. Understanding these age-based milestones is essential for effective retirement planning. My job as a financial planner is to understand your goals to help you strategically navigate these key ages, so you can optimize your retirement savings, maximize your Social Security benefits, and ensure you have adequate healthcare coverage in retirement (whenever that is). Whether you are just starting to plan for retirement or are approaching retirement age, being aware of these milestones will help you make informed financial decisions for a secure future.
Written by: Justin Meyer
1 https://www.irs.gov/taxtopics/tc558
2 https://www.ssa.gov/benefits/retirement/planner/agereduction.html
3 https://www.ssa.gov/benefits/retirement/planner/whileworking.html
4 https://www.nstp.org/article/secure-act-2-0-%E2%80%93-when-does-the-rmd-start
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