What Age Is Considered Early for Retirement?
Defining "early retirement" may seem subjective, but there are some specific ages that government agencies use to provide guidelines for financial planners. A common definition of an early retirement age is before age 65; This is when Medicare benefits come into play.
It's not just the lack of Medicare benefits that early retirees need to plan for. Here are some of the key retirement ages, along with some ways early retirees can overcome them.
Early retirement brings challenges
There's a reason most people continue to work until their traditional retirement age, and it's not because they love their job. Early retirement poses serious financial challenges.
The main challenge is making sure you have enough assets to provide an acceptable level of income for the remaining years.
The average life expectancy in the US is just under 79 years. For someone retiring at age 55, this means they need to save at least 24 years of income. Healthier people who plan to live beyond age 79 will need to save even more.
On the other hand, if you work until age 70, your savings will only need to be kept for a much shorter period of time.
You can use various retirement income calculators, including various Social Security benefit calculators, to help you create a projection. You can also use the services of a qualified financial advisor, preferably someone who specializes in retirement income planning.
How Medicare Affects Early Retirement
As mentioned above, Medicare benefits begin when you turn 65. To be exact, benefits begin on the first day of the month you turn 65.
Retirement before this is considered early retirement and you will need to make other plans to ensure adequate health insurance coverage until Medicare coverage begins. As a retiree, you may not have options for health coverage through an employer, but you can access plans through the health subsidy marketplace.
How Social Security Affects Early Retirement
The Social Security Administration (SSA) uses your year of birth to determine what it calls your "full retirement age."
In other words, the definition of early retirement depends on when you were born.
A peculiarity of this system is that those born on January 1 are counted as part of the previous year. Therefore, if you were born on January 1, 1960, you must refer to the full retirement age for those born in 1959.
The SSA refers to the standard retirement age as the "full retirement age" because it is the age at which you receive all benefits.
Benefits will be reduced by a certain percentage depending on how early you start receiving your benefits. You can retire early, but you will receive a reduced benefit. The first amount you can receive is 62, regardless of your year of birth.
On the other hand, you can delay receiving Social Security benefits, even after you retire, and receive enhanced benefits. You can continue to increase your benefits if you delay Social Security until age 70 (delaying more than 70 will not increase your benefits) .
As with benefit reductions, the amount your deferred benefits will increase depends on the year of your birth.
To delay your Social Security benefits, you will need to use your own assets to generate income in the meantime. With careful planning, this strategy can result in substantially more income for life than receiving benefits up front.
401 (k) Early Retirement Provisions
A common retirement planning tool is a 401 (k) plan. Funds held in these plans are generally available when the account holder reaches 59½, and early withdrawals are often subject to a 10% penalty.
However, there are exceptions to the tax penalty and many account holders can access funds as young as 55 without paying an early withdrawal penalty. This only works if you leave your employer the same year you turned 55 (or later).
Early retirement for civil and military service
Early retirement at age 55 or younger is more common among people who start military or civil service early. This includes the police and firefighters.
Pension plans for these employees generally allow workers to retire with full pension payment before age 65. For example, the Public Service Retirement System allows all workers to retire with full pension benefits at age 62 or 55 in eligible circumstances. Traffic controllers can retire after 25 years of service, regardless of age.
Also, the rule that allows skilled workers to use 401 (k) funds at age 55 is even more lenient for some government employees. Individuals who work in public safety, customs and border protection, federal firefighting, and air traffic control may be eligible for penalty-free withdrawals from their 401 (k) plans at age 50.
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Source: Jazz Wealth Managers
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