The Many Ages of Retirement

Before you decide when to quit working, check out these rules that could make or break your future finances -- and lifestyle

By Ellen Hoffman

Ask people what the retirement age is, and they'll probably say 65. That concept stems from the original Social Security law, passed in 1935, which anointed age 65 as the age at which a worker could receive his or her "full" or "normal" retirement benefit. Yet the reality is quite different. Since 1985, more than half of Social Security recipients have started collecting their benefit at age 62. The average age at which people are starting to receive benefits has remained steady, at around 63½.

So, if 65 isn't the ideal time to retire, what is? Before you answer that question, you need to assess how federal rules and regulations affect both your retirement income and expenses. Warning: Some of these Washington edicts may seem capricious and difficult to decipher. But Deborah Owens of Columbia, Md., author of Confident Investing: A Wealth-Building Guide for Women, points out that failure to carefully analyze how age rules will affect you can derail the best-laid retirement plans.


  Owens offers the example of a middle manager who accepted an early-retirement buyout at age 59, thinking her financial future was secure. When the stock market tanked, she depleted her 401(k) assets much earlier than she had planned. Too young to start on Social Security, she had to return to work and so far has been able to secure only consulting jobs, at a lower salary than she had before.

To help you avoid such missteps, here's a rundown of some of the most important age-related rules, and tips on where to get more detailed information about how they work.

Age 50: You become eligible to make "catch-up" or extra contributions to your 401(k) or similar retirement plan, and to an IRA. This year, the 401(k) catch-up amount is $3,000 over the basic limit of $13,000. For an IRA it's $500 over the basic $3,000. If you stash away these extra savings for a few years, you may be able to retire earlier than you originally expected.

Age 55: If you leave your job or retire, you may withdraw savings from your 401(k) without paying a 10% early withdrawal penalty. However, you will need to pay income tax, unless you roll the money over into an IRA or another 401(k). For details on this and on the next point, consult the IRS's Web site.

Age 59½: You may withdraw money from a 401(k) or your IRA without paying the 10% penalty -- regardless of whether or not you leave your job or retire. You'll have to pay income tax, unless you roll the money over into an IRA or another 401(k).

Age 62: You're eligible to start receiving Social Security. However, you may want to consider waiting. First, the longer you wait (up until age 70), the higher your benefit will be. Another reason to delay is the "earnings test." If you receive Social Security while you're earning money from a job, your benefit will be reduced if your earnings exceed the annual minimum. See the Social Security Web site for the exact rules.

Age 65: You're now entitled to Medicare coverage. Take it, even if you don't plan to go on Social Security yet. The publication, Medicare and You 2004 is a good, basic source. If you want to retire before you turn 65, be sure to explore other options for health insurance because this expense could eat up a substantial portion of your planned retirement income.

Age 62 to 70: You can start collecting Social Security any time now, but the longer you wait, the larger your benefit will be. The size of your benefit will depend on the year you were born, which determines your "full retirement age," an arbitrary point when you will receive what the Social Security calls your full benefit.

Here's an example of how this works. If you were born from 1943 to 1954, your full retirement age is 66. If you wait until 67 to take your benefit, it will be 108% of the level at age 66. If you wait until you turn 70, you'll receive 132% of the amount you'd get at 66. You don't have to start collecting Social Security at any particular age, but there's no point in waiting beyond age 70 -- your benefit won't increase. For details and calculators to figure this out, see this Social Security Web site.

Points to consider in deciding when to start Social Security include what other retirement income you'll have, the potential impact on your tax bill, and your best guess at how many years you may live.

Age 70½: Now you have to stop hoarding the wealth in your 401(k) or IRAs. Uncle Sam requires you to start withdrawing money in the form of a "required minimum distribution" (RMD), based on a complicated formula that hinges on your life expectancy. You'll have to pay income taxes on these withdrawals. (This doesn't apply to a Roth IRA, because you've already paid taxes on those contributions.) Details on how this works are at the IRS Web site.

Once you have a general idea of these rules, the hardest and most important step is yet to come: calculating dollar estimates of how much income you would receive over how many years by retiring at different ages. You can get your Social Security benefit estimates by using the calculators at the Social Security Web site. BusinessWeek Online offers most of the other information you'll need on topics such as withdrawing money from IRAs and estimating retirement expenses .

You should seek help from a financial adviser or from the employee-benefits experts at your workplace if you don't feel up to doing this yourself. If you're married, be sure to determine how the rules might affect both you and your spouse's retirement income.


  If you have a traditional pension plan -- one that will pay you a regular benefit, usually once a month -- Darryl J. Jarmosco, a financial planner in Grand Haven, Mich., says your first step should be to read your employee handbook or check with your human-resources department on exactly what your benefits will be if you retire at various ages.

While sorting out these age rules may not be your idea of fun, you should embark on this project sooner rather than later, says Jarmosco, because "financial security is accomplished by doing a little bit over a longer period of time," not by trying to make up for lost time at the last minute.

In addition to writing Your Retirement for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site

Edited by Patricia O'Connell