Determining the Optimal Retirement Age: Key Considerations and Strategies

For some people, retirement may herald the end of an office job they've worked for decades. They're in their late 60s and can finally transition to a lifestyle of less work and more travel, relaxation, or fun. For others, there may not be an end in sight. They may want to keep working into their 70s with a delayed retirement plan, or they may opt for early retirement at age 62.

You may find it challenging to determine the optimal retirement age, as there are several factors to consider, such as your choice of lifestyle, monthly expenses, health, and retirement savings. Here are the key considerations for the best retirement age and helpful strategies to optimize your retirement.

What is the best age to retire?

Choosing the right retirement age may depend on your personal preferences or the age requirements to receive your pension plan or retirement savings, such as fixed annuities, and Social Security and health benefits. Some of these benefits have specific age milestones you must reach before withdrawing or receiving the full benefits without penalty.

You must also consider your expected living expenses after you retire and ensure that you build an income that covers you for the rest of your life. A 2022 Gallup poll showed that although the expected retirement age was 66, the average retirement age was 61. Your ideal retirement age occurs when you can be financially secure without working and maintain your happiness and satisfaction post-retirement.

How old do you have to be to retire: key considerations

When determining when to retire, consider the age requirements for your expected retirement income and benefits. For example, you can claim Social Security benefits as early as age 62. Based on your birth year, you would receive a reduced benefit of between 25% and 30% of the full amount. Social Security retirement benefits are a monthly payment covering part of your income when you reduce your working hours or quit altogether.

In 2024, those born in 1958 must be 66 years and 8 months old to collect full Social Security benefits. The age requirement gradually increases to 67 for those born in 1960 or later. Delaying collection until age 70 or older may increase the benefit amount. By strategically planning your retirement age, you can potentially increase your Social Security benefits, securing a more stable financial future.

You should also consider your health care needs when deciding when to retire. Your health may remain unchanged, or you may require ongoing medical care. Regardless of your health situation, consider health insurance, doctor's visits, and prescription medicine costs in your retirement plan.

Medicare is federal health insurance for people aged 65 or older. Your Medicare Initial Enrollment Period begins three months before you turn 65 and ends three months after you turn 65. If you need prescription medication and frequent doctor's visits and retire before the Medicare age requirement, you might pay expensive insurance premiums to prevent coverage gaps. If you delay applying for Medicare, you may be subject to late enrollment penalties.

The pros and cons of early retirement

When you reach your mid-50s or early 60s, you may begin thinking of retirement to stop working so much and enjoy life more. The traditional or normal retirement age is between 65 and 67, depending on your birth year. Early retirement occurs when you leave the workforce before the NRA.

The benefits of early retirement may include not waking up to an alarm every morning and commuting to work. It also may mean you have more time to travel, start new hobbies, and focus on your health and longevity. Being in the workforce can help some people maintain social connections and keep their minds active as they negotiate various work challenges. If you enjoy these aspects of working, you may miss them if you decide to retire early.

Retiring at age 62 may seem appealing as you can begin collecting Social Security benefits, but the reduced benefits can be a significant drawback to early retirement, especially if your retirement income doesn't cover your expenses. Early retirement before age 65 can also put your Medicare benefits at risk, potentially leading to out-of-pocket expenses for medical insurance or inadequate health care coverage.

If you choose to retire you may need a large nest egg to pay for your monthly expenses and maintain a comfortable lifestyle. Early withdrawal from certain retirement savings accounts may incur tax penalties. Before making any decisions, consult a financial adviser. They can explain the potential tax implications and help you develop a comprehensive retirement strategy.

The pros and cons of late retirement

Late or delayed retirement happens after you reach age 65 and are still working. There may be some benefits to working past age 70, as it can stimulate your mind and keep you socially connected with your coworkers and customers.

But it may also adversely affect your health, especially if you have a stressful or physically demanding job. You might have less time to travel, pursue your hobbies, and take care of your health, which are fundamental to fulfilling retirement.

A major benefit of delayed retirement is the opportunity to increase your retirement income for the highest possible payout. If you retire at age 70, you may collect increased Social Security benefits of 132% of the full monthly benefit compared with 100% at age 66. Another financial benefit to late retirement is lower health insurance premiums since you qualify for Medicare. If you choose to continue working, you must apply for Medicare at age 65 to avoid late enrollment penalties and coverage gaps.

Retirement planning: top strategies

Planning for retirement is essential to lower your risk of running out of money when you stop working. Here are some helpful strategies to guide your preparations.

Determine your desired retirement age and lifestyle

Choose a retirement age that best aligns with your financial and personal needs. Think about the kind of lifestyle you want to have in retirement. Would you like to move to another location, perhaps another country? Assessing the potential cost of your desired lifestyle can help determine how much you may need to retire and live comfortably.

Here are some key questions to ask when planning for retirement:

• Will I be able to collect Social Security and Medicare benefits when I retire? If so, how much?
• Which types of retirement savings accounts can best help me accumulate the money I need for my desired retirement lifestyle? How much will tax deductions affect my savings?
• How much money should I contribute monthly to these retirement savings accounts?

Determine your retirement spending needs

When determining your retirement spending needs, be realistic about how much you may expect to spend. Consider the total costs of housing, health care, travel, and hobbies to gauge how much you may need to cover your retirement expenses. You may want to maintain your pre-retirement lifestyle with few changes or have a completely different way of life. The more accurate your retirement spending goals, the easier your retirement planning may be.

Understand your retirement savings accounts and withdrawal requirements

Part of your retirement plan should include reviewing retirement savings accounts to which you or your employer contribute to secure financial stability during your retirement. You may also want to factor in potential tax penalties from early withdrawal if you retire before the plan's required distribution age. Here's an overview of some retirement plans and their withdrawal requirements:

• Defined benefit pension plans: Your employer contributes money into a defined benefit pension plan, which becomes available as a guaranteed monthly income when you retire. This monthly income considers your years of service with the employer or company and your salary during the years worked.
• Defined contribution pension plan: With a defined contribution pension plan, you contribute to your savings account from your salary. Your employer may make additional contributions to this account. Unlike the defined benefit pension plan, you may not get a guaranteed monthly benefit because of the risk of low contributions resulting in insufficient funds to cover your retirement expenses for the rest of your life.
• Pension plan withdrawal requirements: Because you use pension plans for retirement, the federal government imposes a tax penalty of up to 20% on early withdrawals from qualified plans before the required retirement age. Defined contribution plans may allow you to access your funds penalty-free from 59 years and 6 months. Defined benefit plans typically set their retirement distribution age at 62 or 65.
• Fixed annuity: A fixed annuity, or multi-year guaranteed annuity, is a retirement savings plan through an insurance company that provides tax-deferred accumulation at a guaranteed fixed rate for a predetermined period, usually between two and 10 years.
• Fixed index annuity: This type of annuity is a contract that offers the potential for growth and the ability to turn retirement assets into lifetime income through annuitization. This contract allows you to earn index-linked interest without the risk or loss caused by volatile stock markets. Common FIA term length options are three, five, or 10 years.
• Annuities withdrawal requirements: While annuities are excellent additions to your retirement plan, you may face a penalty for early withdrawals.
• Required minimum distribution: An RMD is the amount of money that you must withdraw annually from certain employer-sponsored retirement savings accounts. You must begin withdrawals from these accounts when you reach age 72. You can calculate the amount by the balance of the retirement plan before December 31 and the IRS life expectancy table for RMDs.
• Tax implications on withdrawals: Retirement plan withdrawals are subject to income taxes at any age. Depending on the plan, the payouts may be taxable as regular income, or you may only need to pay taxes based on the interest earned. Consult a financial adviser to minimize your tax burden during retirement.

Start planning for your retirement

When planning for your retirement, you should consider several factors, such as your retirement benefits, savings plans, tax implications, personal preferences, and overall health. It's never too late to start planning for your retirement and getting your finances in order so you can live comfortably. You may be able to convert your retirement savings into lifetime income with a fixed annuity or fixed index annuity. Try our online income annuity quote calculator to get current MYGA or FIA rates and start your journey to financial security in retirement.

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