Life expectancy has increased at a steady pace over the years, and is expected to continue increasing. In 2014, there were more than 3.3 million people age 85 and over in the United States. By 2019, that population had grown by more than 250,000. (Source: U.S. Census Bureau, Older Population in the United States, 2014 and 2019)
Timing is Everything
When it comes to transitioning into retirement, timing
really is everything. The age at which you retire can have an enormous impact
on your overall retirement income situation, so you'll want to make sure you've
considered your decision from every angle. In fact, you may find that deciding
when to retire is actually the product of a series of smaller decisions and
Your retirement: How long should you plan for?
The good news is that, statistically, you're going to live
for a long time. That's also the bad news, though, because that means your
retirement income plan is going to have to be sufficient to provide for your
needs over (potentially) a long period of time.
How long? The average 65-year-old American can expect to
live for more than 19 additional years.1 Keep in mind as well that life
expectancy has increased at a steady pace over the years, and is expected to
The bottom line is that it's not unreasonable to plan for a
retirement period that lasts for 30 years or more.
Thinking of retiring early?
Retiring early can be wonderful if you're ready both
emotionally and financially. Consider the financial aspect of an early
retirement with great care, though. An early retirement can dramatically change
your retirement finances because it affects your income plan in two major ways.
First, you're giving up what could be prime earning years, a
period of time during which you could be adding to your retirement savings.
More importantly, though, you're increasing the number of years that your
retirement savings will need to provide for your expenses. And a few years can
make a tremendous difference.
There are other factors to consider as well:
- A longer retirement period means a greater potential for
inflation to eat away at your purchasing power.
- You can begin receiving Social Security retirement
benefits as early as age 62. However, your benefit may be as much as 25% to 30%
less than if you waited until full retirement age (66 to 67, depending on the
year you were born).
- If you're covered by an employer pension plan, check to
make sure it won't be negatively affected by your early retirement. Because the
greatest accrual of benefits generally occurs during your final years of
employment, it's possible that early retirement could effectively reduce the
benefits you receive.
- If you plan to start using your 401(k) or traditional IRA
savings before you turn 59½, you may have to pay a
10% early distribution penalty tax in addition to any regular income tax due
[with some exceptions, including payments made from a 401(k) plan due to your separation from service in or after the year you turn 55, and distributions due to disability].
- You're not eligible for Medicare until you turn 65. Unless
you'll be eligible for retiree health benefits through your employer (or have
coverage through your spouse's plan), or you take another job that offers
health insurance, you'll need to calculate the cost of paying for insurance or
health care out-of-pocket, at least until you can receive Medicare coverage.
Thinking of postponing retirement?
Postponing retirement lets you continue to add to your
retirement savings. That's especially advantageous if you're saving in
tax-deferred accounts, and if you're receiving employer contributions. For
example, if you retire at age 65 instead of age 55, and manage to save an
additional $20,000 per year in your 401(k) at an 8% rate of return during that
time, you can add an extra $312,909 to your retirement fund. (This hypothetical example of mathematical principles is not intended to reflect the actual performance of
any specific investment. Fees and expenses are not considered and would reduce the performance shown if they were included. Actual results will vary.)
Even if you're no longer adding to your retirement savings,
delaying retirement postpones the date that you'll need to start withdrawing
from your savings. That could significantly enhance your savings' potential to
last throughout your lifetime.
And, of course, there are other factors that you should
- Postponing full retirement gives you additional transition
time if you need it. If you're considering a new career or volunteer
opportunities in retirement, you could lay the groundwork by taking classes or
trying out your new role part-time.
- Postponing retirement may allow you to delay taking Social
Security retirement benefits, potentially increasing your benefit.
- If you postpone retirement beyond age 72, you'll need to
begin taking required minimum distributions from any traditional IRAs and
employer-sponsored retirement plans (other than your current employer's
retirement plan), even if you do not need the funds.2
|Key Decision Points|
|Eligible to tap
penalty||59½3||Federal income taxes will be due on pre-tax contributions and earnings|
|Eligible for early
benefits||62||Taking benefits before full retirement age reduces each monthly payment|
|Eligible for Medicare||65||Contact Medicare three months before your 65th birthday|
|Full retirement age for Social Security||66 to 67, depending on when you were born||After full retirement age, earned income no longer affects Social Security benefits|
1National Center for Health Statistics Data Brief, Number 355, January 2020
2The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019 raised the RMD age from 70½ to 72, effective January 1, 2020. Anyone who turns 72 before July 1, 2021, (and therefore reached age 70½ before 2020), will need to take an RMD by December 31, 2021.
3Age 55 for distributions from employer plans upon termination of employment (age 50 for qualified public safety employees); other exceptions apply.