The thought of not reporting to an employer on an almost daily basis and doing whatever you like with your time can be enticing, and you may want to jump into that life sooner rather than later. But not everyone is willing to retire early. AARP cites a 2021 Employee Benefit Research Institute study that indicates that only about 11 percent of workers were looking forward to early retirement before age 60.
There are a few critical factors to keep in mind when you're pinning down your ideal retirement age, and the source of your retirement income is perhaps the most critical. AARP also indicates that your monthly budget might drop to about 80 percent of what you're spending now, and the U.S. Department of Labor puts it in the same ballpark at 70 to 90 percent.
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But that 401(k), traditional IRA or other retirement account comes with an age limitation as well.
But the exact opposite could happen in the first years of retirement if you're traveling and catching up on all those things you didn't have time to enjoy in your working years. Will you have enough money?
Social Security benefits are a critical component of retirement income planning for most Americans. You can begin collecting Social Security at age 62, according to the Congressional Research Service, but this really can't be considered an "ideal" retirement age.
You'll receive "reduced" benefits at age 62, perhaps 25 to 30 percent less depending on your year of birth. You'll have to wait until your "full retirement age" to begin collecting the most Social Security you're entitled to. Even worse, this reduction is permanent. Your benefits won't increase when you do hit your full retirement age.
Your full retirement age depends on your year of birth. It creeps upward in monthly increments for every birth year beginning in 1938. But here's some good news: It tops out at age 67 for those who were born in 1960 or later, so that's the longest you'll have to wait, at least as of 2022. And you'll receive 32 percent more if you tough it out and work until age 70.
The Social Security Administration provides a calculator on its website to help you pin down how much you can expect to receive based on various age scenarios.
Other Retirement Benefits and Savings
Of course, you may have been diligently saving money for years in anticipation of the big day. But that 401(k), traditional IRA or other retirement account comes with an age limitation as well.
The golden number, in this case, is 59½. You'll have to pay an IRS tax penalty of 10 percent of the amount of any withdrawals you take prior to this age. And this is in addition to paying income tax on the distributions, so you'll definitely want to keep your tax bill in mind when you're doing your retirement planning.
Roth IRAs are an exception to the income tax rule because, unlike traditional accounts, they're funded with after-tax dollars. You can't claim a tax deduction for these contributions, but that age 59½ rule still applies.
Other Factors to Consider
Then there's the matter of healthcare, which becomes more critical as we get older. Medicare has an age rule, too. You're not eligible for coverage until age 65. You'll want to add some hefty premiums for health insurance coverage into your retirement budget for the first few years if you plan on retiring before then. And uninsured healthcare costs can be catastrophic.
Setting a Target Date
Your ideal retirement age comes down to your anticipated budget, and we don't live in a stagnant world. Your projected budget based on the 2022 economy will probably be much less (or even more!) than you'll need in 2027.
The next issue is determining how you'll meet that budget. Do you have a retirement savings nest egg? And, if so, how much can you afford to draw off those savings annually? Are you going to try to get by on Social Security?
Your benefits will be reduced incrementally according to your earnings over a certain threshold if you begin collecting before full retirement age, then you realize you really have to pick up a part-time job to make ends meet. But you can earn as much as you like after full retirement age without it impacting your benefits, according to the Social Security Administration.
Annuity.org provides a calculator on its website to help you out if you feel a bit – or a lot – overwhelmed by all these factors. Enter your personal information and find out how long you have to wait until your ideal retirement age.
- Annuity.org: Retirement Age Calculator
- Social Security Administration: Retirement Benefits
- Congressional Research Service: The Social Security Retirement Age
- AARP.org: 10 Things Nobody Tells You About Early Retirement
- U.S. Department of Labor: Top 10 Ways to Prepare for Retirement
- Medicare.gov: When Does Medicare Coverage Start?
- IRS: What If I Withdraw Money From My IRA?
- Social Security Administration: Receiving Benefits While Working
Social Security Benefits