Counting Your Money and Not Your Years

Picking a retirement date has as much to do with your financial status and lifestyle choices as your chronological age

By Ellen Hoffman

A year ago, you might have thought your stock options would let you retire comfortably at 50. Or maybe you were counting on the Nasdaq to finance your life of leisure -- and sooner rather than later.

But chances are you've seen your market-invested retirement accounts shrink considerably in the last year, which may have you rethinking when you should -- or can -- retire. It's a tough question to answer, even if you haven't seen your resources dwindle and your dreams disappear in the last 12 months. According to financial planners, one of the most difficult aspects of planning for retirement is picking the ideal age to quit the rat race -- mainly because there is no ideal time, and various factors need to be considered.

Age is a good one to start with because Social Security and most likely any pension you'll get from your employer(s) are age-specific benefits. Also, how old you are governs when you can access retirement funds from other sources. Making sure you understand the rules set forth by both the government and employers regarding these benefits will help you maximize them. The following timetable highlights the most important age-related rules. Of course, they could change by the time you're ready to call it quits, but the list may help you target a realistic retirement age.

Before age 59 1/2: Generally, you will pay penalties as well as income taxes if you withdraw money from either a traditional or Roth IRA before you turn 59 1/2. However, you can avoid the penalties in several ways. For specific instructions, see Individual Retirement Arrangements, IRS Publication 590, available at the IRS Web site.

If you retire from a private company, you may withdraw your 401(k) money at age 55 without penalty, but you must pay income tax on it unless you roll it over into an IRA. The 401(k) money can only be withdrawn before 59 1/2 upon retirement.

59 1/2: You may withdraw money from a 401(k) or similar retirement plan, or from a traditional IRA, without penalty, regardless of whether you retire. However, you will pay income tax on it. At this age, you can withdraw from your Roth IRA and pay no taxes, provided the account has been in place for at least five years.

62: You'll be eligible for Social Security. If you sign up to start collecting at this age, the benefit will be 20% less for the rest of your life than it would be if you wait until your "normal retirement age." The longer you wait until your NRA, the less your benefit will be reduced. If you hold on until your NRA, you'll receive the full benefit. To find your NRA, visit this Social Security Web page.

Under the Social Security "earnings test," if you want to work full- or part-time before turning 65 and if you earn more than $25,000 a year, your benefit will be reduced. The formula varies according to age.

65: If you were born before 1938, you'll qualify for your full Social Security retirement benefit at 65. Because of legislation approved last year, you may also earn as much in wages as you wish without having your benefit reduced. If you postpone your retirement until after 65, you'll increase your benefit by as much as 8% per year, depending on what age you do retire. The chart on this page will show you the rates. You'll also qualify at 65 for Medicare, which will cover most of your medical expenses in and out of the hospital. But you'll still be responsible for some co-payments and prescription drugs. You can read about how the program works at the main Medicare Web site.

65 and 2 months: If you were born in 1938, you'll qualify for your full Social Security benefit at this age. If you were born after 1938, you'll qualify at a different age -- see the NRA chart above. If you postpone starting Social Security to any time until 70, you'll increase your benefit.

70: The age by which you should start collecting Social Security. Waiting beyond this age won't boost your benefit.

70 1/2: By Apr. 1 of the year after you turn 70 1/2, you must start withdrawing money from your traditional IRA. To learn more about new IRS rules for doing this, see BW Online, 1/18/01, "Surprise! The IRS Makes Life Easier for Retirees." You're not required to withdraw money from your Roth IRA by or at a certain age.

If you have a traditional pension, which guarantees a certain retirement income, you'll probably have to meet your employer's age requirements as well as length-of-service requirements. These vary by employer. Also, you'll have to check with your employer to find out at what age you can withdraw your 401(k) money without penalty.

Once you understand what benefits will be triggered at what age, it makes sense to think about personal and financial considerations. One of the most important will be your health and, if relevant, that of your spouse. For example, if one of you has had a life-threatening illness, you may want to retire earlier than you originally planned, points out Barbara O'Neill, a Rutgers University professor and the author of Investing on a Shoestring. But if you retire before you're eligible for Medicare (at 65), getting affordable health insurance could be a big problem.

Sandra Johnson, a financial adviser in St. Cloud, Minn., has clients who, if they retired before 65, would have to pay $850 per month to continue their employer-sponsored insurance under the government's Consolidated Omnibus Budget Reconciliation Act rules. And COBRA guarantees you coverage for only 18 months. For details on how COBRA works, see a pamphlet on the U.S. Labor Dept. Web site.

People who don't qualify for or can't afford COBRA have to look in the open market for health insurance, which is almost always more expensive for comprehensive coverage.


  You also need to weigh how you feel about working vs. what else you want to do. You may be one of those people who can't imagine not working, regardless of financial considerations. But Johnson has clients in their 40s who probably won't be able to retire as soon as they would like. The husband is tired of working and wants to retire at 57. The wife likes her job and is willing to wait until 62.

But he may be forced to work longer: He earns two-thirds of their $90,000 annual income, and they have one child in college and are committed to paying the educational expenses of three more children. Given their incomes, it's unlikely they'll be able to fund both retirement and college by their target retirement ages.

"People often have an unrealistic idea of how long their savings are going to last," says Johnson. To avoid running short of money in retirement, she says you need to start estimating how much you'll need as early as possible. She urges people in their 30s to start planning now because "you'll have plenty of time to go through up and down markets" and still save the money you need.


  Even if you can't answer all the relevant retirement questions now, such as where you'll live, what it'll cost, and how you'll spend your time, you can start making preliminary estimates. Good Web tools for doing this are at and

Doing these calculations can be sobering. Once you see the numbers, you may realize that retiring at 50 is an unaffordable pipe dream, but that if you stick it out for a few more years, you'll be able to afford everything you want. You'll also be asking and answering the right question, which Johnson says is not how old you should be when you retire, but "when will I have enough money saved to live the lifestyle I need?"

Hoffman writes Your Retirement twice a month, only for BW Online

Edited by Patricia O'Connell

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