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When do you expect to retire? I ask this question to people before analyzing their financial situations or determining the feasibility of their retirement plans. There is often a preconceived notion of retirement age based on government-set dates such as 59 ½, 62, and 65, which have an impact on taxation and benefits.

Consider your unique goals and circumstances to determine your target retirement age. That might sound obvious, but it’s more difficult in practice. It’s one reason you might consider working with a financial planner.

My hope for you is that you have a sustainable spending plan, but at the same time, you enjoy your retirement to the fullest. Sometimes, retiring earlier can be a better option to make the most of your wealth while you are healthy enough to do so.

This article explores why relying on arbitrary ages to guide retirement decisions may not be the best approach. In the absence of other data points, it’s easy to conflate your retirement age with these three government-set ages:

• Age 59 ½ – When you can access your accounts without Penalty
• Age 62 – When you can claim Social Security
• Age 65 – When you go on Medicare

Age 59 ½ – When you can access your accounts without Penalty

If you have any kind of retirement investment account, such as an IRA or 401(k), you may be aware of the age 59 ½, which is the age at which you can access your retirement accounts without incurring a penalty.

However, there are exceptions to this rule, such as death and disability. While it is tempting to believe that you cannot access these accounts until you reach the age of 59 ½, there is a lesser-known but practical way to create an exception to the 10 percent penalty when you access your retirement accounts before this age. This option is called 72(t) or Substantially Equal Periodic Payments (SEPP).

SEPP is a way to create a reliable income stream from your retirement accounts, similar to creating an annuity but without the formality or restrictions of implementing an annuity with an insurance company.

 It is important to follow several rules to implement SEPP accurately and avoid any adverse tax issues down the road. Therefore, it is worth consulting with a financial planner or tax expert before implementing SEPP.

It is also important to note that there are other ways to create income in your early retirement years without accessing retirement-specific accounts. For example, you can consider taxable brokerage accounts and strategic debt solutions.

Age 62 – When you can claim Social Security

Many people consider retiring at age 62, which is the earliest age to claim Social Security benefits. However, the decision to retire should not solely depend on Social Security.

While some individuals can retire at 62 and receive a significant portion of their pre-retirement earnings, others may receive a lower replacement rate that may not impact their retirement date decision.

I recommend you separate the decision to retire from the decision to claim Social Security benefits. Although these decisions may coincide in some cases, delaying Social Security benefits is advisable in certain circumstances.

In fact, delaying Social Security benefits until the age of 70 can be an effective strategy for retirement income planning for either one or both spouses in a married couple.

Keeping with the theme of this piece, it’s common for delays to extend past the actual retirement age, which may be much earlier than the age of 70. For a more detailed analysis of Social Security, please refer to our earlier blog post, The Top Four Questions I’m Asked About Social Security.

Age 65 – When you go on Medicare

Approaching the age of 65, many people start receiving numerous solicitations from brokers selling different Medicare plans like Advantage, Part B supplements, and Prescription Drug plans.

As age 65 is the most common age to enroll in Medicare, it may seem logical to make it your retirement age as well. After all, this approach can help you control healthcare costs.

However, retiring earlier than 65 might not be as expensive as you think. If you get your health insurance through the marketplace, you may be eligible for tax credits that significantly reduce your premium costs.

As I explained in more detail in an earlier blog, Navigating Your Health Insurance Options if You Retire Early, tax credits are often available to individuals with a large accumulated wealth or net worth. This is because credits are calculated based on your income.

While Medicare may be your primary source of health insurance during retirement, it doesn’t have to be your only option, especially in early retirement.

Early retirement can provide you with more options to reduce your income while still maintaining your desired lifestyle. This can be advantageous when calculating tax credits. It’s a good idea to consult a financial planner to work out the numbers.

Concluding Thoughts

Planning your retirement age is an important decision that should not be left to chance. While the government-set dates mentioned in this blog are not entirely arbitrary, there are better ways to plan for retirement.

I recommend you start planning early, even if your retirement is still many years away. This will help you gain clarity on how to spend your time and determine which goals are realistic and achievable. Seeking the help of a financial planner can also be of great assistance in this regard.

It is worth noting that the term “retirement” is used in a broad sense and does not necessarily mean a complete retirement from work. It could instead be a partial or semi-retirement, or an extended period away from work, like a sabbatical, with the intention of returning to work later.

It is entirely possible that once you reach your target retirement age, you may find that you do not want to retire. You might enjoy your work and want to continue, which is fine. Alternatively, you may have reached a point where work is optional, which can be liberating in and of itself.

If you have comments or questions on this piece, please drop me a line at: [email protected]

References

1. https://krishnawealth.com/the-value-of-having-debt-capacity/
2. https://krishnawealth.com/the-top-four-questions-im-asked-about-social-security/
3. https://www.healthcare.gov/get-coverage/
4. https://krishnawealth.com/navigating-your-health-insurance-options-if-you-retire-early/

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