Defining an "early retirement" might seem subjective, but there are a few specific ages that government agencies use to give financial planners guidelines. One common definition of an early retirement age is any earlier than 65—that's when Medicare benefits kick in.
It isn't just the lack of Medicare benefits that early retirees have to plan for. Here are some of the milestone ages for retirees, along with some ways for early retirees to work around them.
Early Retirement Comes With Challenges
There's a reason most people continue to work until traditional retirement ages, and it isn't because they love their jobs. Retiring early comes with serious financial challenges.
The primary challenge is ensuring that you have enough assets to provide an acceptable level of income throughout your remaining years. The average lifespan in the U.S. is just under 79 years. For someone who retires at 55, that means they need to save up at least 24 years' worth of income. Healthier individuals who plan on living beyond the age of 79 will need to save up even more.
On the other hand, if you work until you reach age 70, your savings will only need to provide for a much shorter time frame.
You can use various retirement income calculators, including several Social Security benefits calculators, to help you create a projection. You can also use the services of a qualified financial advisor—ideally someone who specializes in retirement income planning.
How Medicare Affects Early Retirement
As mentioned above, Medicare benefits start when you turn 65. To be exact, benefits kick in on the first day of the month in which you turn 65. Retiring earlier than that is considered early retirement, and you will need to make other plans to secure adequate health insurance coverage until your Medicare coverage begins. As a retiree, you likely won't have health care coverage options through an employer, but you can access plans through the health exchange marketplace.
How Social Security Affects Early Retirement
The Social Security Administration (SSA) uses your birth year to determine what it calls your "full retirement age." In other words, the definition of early retirement depends on when you were born.
One quirk to this system is that those born on January 1 are counted as part of the previous year. So, if you were born on January 1, 1960, you should refer to the full retirement age for those born in 1959.
Check the chart below for a full list of standard, or "full," retirement years by birth year.
|Full Retirement Age by Birth Year (as of May 27, 2020)|
|Birth Year||Full Retirement Age|
|1937 or earlier||65|
|1938||65 and two months|
|1939||65 and four months|
|1940||65 and six months|
|1941||65 and eight months|
|1942||65 and 10 months|
|1955||66 and two months|
|1956||66 and four months|
|1957||66 and six months|
|1958||66 and eight months|
|1959||66 and 10 months|
|1960 or later||67|
SSA refers to the standard retirement age as "full retirement age," because that is the age at which you receive your full amount of benefits. The benefits will be reduced by a certain percentage, depending on how early you begin taking your benefits. You can retire earlier, but you will receive a reduced benefit. The earliest you can receive any amount is 62, no matter your birth year.
On the other hand, you can delay receiving Social Security benefits—even after you've retired—and receive enhanced benefits. You can continue to enhance your benefits by delaying Social Security until age 70 (delaying beyond age 70 won't enhance your benefits). As with benefit reductions, the amount your delayed benefits will increase depends on your birth year.
To delay your Social Security benefits, you would need to use your own assets for income in the meantime. With careful planning, this strategy can get you substantially more lifetime income than taking benefits early.
401(k) Early Retirement Provisions
A common retirement planning tool is a 401(k) plan. Funds held in these plans usually become available once the account holder becomes 59 1/2, and early withdrawals are often subject to a 10% penalty tax. However, there are exceptions to the penalty tax, and many account holders may be able to access funds as early as age 55 without paying an early-withdrawal penalty tax. That only works if you leave your employer in the same year you turned 55 (or later).
There are a lot of similarities between 401(k) plans and Individual Retirement Accounts (IRAs), but they differ on exceptions to early-withdrawal penalties. Leaving your employer at age 55 does not entitle you to penalty-free withdrawals on your IRA funds.
Early Retirement for Military and Civil Service
Early retirement at age 55 or younger is more common among people who began military or civil service at an early age. This includes police officers and firefighters. Pension plans for these employees typically allow workers to retire with full pension payments before the age of 65. For example, the Civil Service Retirement System allows all workers to retire with full pension benefits at 62, or at 55 under qualifying circumstances. Air traffic controllers can retire after 25 years of service, no matter their age.
In addition, the rule that allows qualifying workers to draw on 401(k) funds at age 55 is even more forgiving for some government employees. People who work in public safety, customs and border protection, federal firefighting, and air traffic control may be eligible for penalty-free withdrawals from their 401(k) plans at age 50.
The Bottom Line
The definition of "early retirement" depends on your career and other personal circumstances. No matter the age that defines early retirement for you, you may find that it's difficult to afford it unless you receive an inheritance or experience a windfall of cash. For most folks, the best way to retire early is to start planning well ahead of their desired retirement age. You'll need to save a lot and find ways to live on less money—or better yet, do a bit of both.
Frequently Asked Questions (FAQs)
What age is considered early retirement for women?
Women may have to work longer than men to fund a comfortable retirement, according to the U.S. Department of Labor. They may contribute less to Social Security, because they're more likely to work part time and take extended breaks from working in order to deal with family responsibilities. They're also less likely to have access to employer-sponsored retirement plans.
When can I apply for Social Security if my full retirement age is 66?
You can apply four months before you want to begin collecting Social Security benefits. Social Security is paid in the month after the benefits are due.
Centers for Medicare & Medicaid Services. "When Will My Coverage Start?"
Centers for Disease Control and Prevention. "Life Expectancy."
Social Security Administration. "Starting Your Retirement Benefits Early."
Social Security Administration. "Delayed Retirement Credits."
Internal Revenue Service. "Exceptions to Tax on Early Distributions."
Office of Personnel Management. "Civil Service Retirement System (CSRS)."
U.S. Department of Labor. "5 Things to Know About Women and Retirement."
Social Security Administration. "Apply for Retirement Benefits."