Unlike some other countries that mandate a single retirement age for all employees, regardless whether they work in the public or private sector, there's no minimum retirement age in the United States. Excepting for certain government employees, you have the ability to retire any time you want. There are, however, some significant milestones that impact your ability to claim Social Security retirement benefits and draw penalty-free from your Individual Retirement Arrangement or 401(k). These ages are key since they determine whether you can realistically afford to retire.
Age 55: Employer Retirement Benefits
Unless you're happy to pay a 10 percent tax penalty, then you shouldn't be taking distributions from a 401(k) plan before age 59 1/2 – more on that below. However, there's a little-known exemption which means the tax penalty doesn't apply for employees who "separate from service" with their employer at or after age 55.
Here's how it works: if you quit, are fired or are permanently laid off by your employer at age 55 or older, you're permitted to take the money from your pension plan as a lump sum distribution without triggering the 10 percent tax penalty. To be clear, this rule only applies to company-established defined contribution plans, not IRA accounts. To maintain the penalty-free distribution, you must not roll the funds into an IRA.
This provision is a boon to those who wish to retire early. And in fact, you could begin to work for another employer and still take advantage of these penalty-free withdrawals.
Age 57: Federal Employees Retirement
Ever wondered why federal employees seem to retire so early? It's because the Federal Employees Retirement System, or FERS, establishes the Minimum Retirement Age, or MRA, at which a federal employee can retire. For most employees, that age is 57. Those born before 1970 can retire a little earlier, although the exact age depends on the year they were born. Here's the breakdown:
- Workers born before 1948 can retire at age 55.
- For workers born between 1948 and 1953, two months are added for each birth year after
- For instance, someone born in 1949 would reach MRA at 55 and four months.
- For instance, someone born in 1949 would reach MRA at 55 and four months.
- For workers born between 1953 through 1964, the MRA is fixed at 56.
- For workers born between 1965 and 1970, the two-month rule kicks in again topping out at age 57 in 1970.
It's up to you whether you retire upon reaching the MRA – there's no mandatory retirement age for government employees. However, under FERS retirement rules, you're not entitled to an immediate retirement benefit unless you hit a combination of age and federal service years. This can push the retirement age out considerably:
- Age 62 with five years of service
- Age 60 with 20 years of service
- MRA with 30 years of service
Here's an example. Suppose that an employee begins federal service in 1993 at age 32. After 24 years of loyal service, she reaches age 56, the MRA for people born in 1961. This person is eligible to retire. However, she has not yet reached the minimum combined age of MRA plus 30 years of service. Therefore, she has another four years left until her eligibility for retirement benefits kicks in (age 60 with at least 20 years of service).
Age 59 1/2: Retirement Account Withdrawals
You can start to withdraw from your IRA and 401(k) when you reach age 59 1/2 for any reason without paying a penalty. The same goes for other employer-established defined contribution plans like a 403(b) or 501(c). If you make a withdrawal from these funds at a younger age, you will pay 10 percent of the withdrawal in early payment penalties. Unless it's a Roth account, you'll also pay regular income taxes on the money you withdraw.
There are exceptions: you can withdraw for certain medical expenses, for example, and a first-time home buyer can pull up to $10,000 from her IRA at any age without penalty if the money is used as a down payment on a home. But these exceptions are for hardship-type situations. Generally, you're going to have to wait until you're 59 1/2 to avoid losing the 10 percent.
Roth IRAs are funded with posttax dollars so you can withdraw your original contributions at any time, at any age and for any reason, with no taxes or penalties. But if you withdraw the investment gains or rollover amounts before age 59 1/2, or before you've had the Roth account for five years, taxes and penalties will apply.
Age 62: Social Security Benefits
In all cases, 62 is the age when you're first eligible to collect Social Security retirement benefits. But you probably won't be eligible to collect the full benefit until much later when you reach the full retirement age. Currently, the full retirement age is 66 for those born in 1954 or earlier, increasing by two months per birth year until it reaches age 67 for those born in 1960 or later.
Filing at age 62 is possible, but if your full retirement age is 67, filing early will reduce your benefit by 30 percent. If, on the other hand, you delay taking benefits until age 70 and were born in 1943 or later, your benefit amount will increase by 8 percent per year – 24 percent in total – until you begin collecting benefits.
Age 65: Eligibility for Medicare
Unless you qualify on grounds of disability, age 65 is the youngest you become eligible for Medicare, regardless whether you've filed for Social Security benefits yet. You must be a U.S. citizen or a permanent legal resident for at least five continuous years to receive full Medicare benefits. If you meet these requirements and have worked at least 10 years while paying Medicare taxes, you receive Medicare Part A (hospital insurance) without paying any premiums.
If you're a few years away from retirement, be aware that the minimum Medicare-enrollment age may soon change to 67. There's been an increase in average life expectancy since Medicare benefits were conceived, which means the plan may not be sustainable in its current form; basically, the coffers are running low. It's highly likely that starting after 2020, two months each year will be added to the Medicare eligibility age until 2033, when it reaches 67.
Age 70: Mandatory Distributions
If there's such a thing as a maximum retirement age, it's 70. While you definitely can keep working after this age – look at Warren Buffett – you'll be forced to start taking distributions from your 401(k) or traditional (non-Roth) IRA. From age 70 1/2, the Internal Revenue Service requires you to start taking minimum distributions based on your life expectancy. There's also no reason to delay Social Security benefits beyond age 70, as you've taken all your delayed retirement credits.
- FedWeek: Retirement Eligibility and FERS Minimum Retirement Age
- Ed Slott and Co: Age 55 Rule For taking Money Out of a Company Retirement Plan
- Social Security Administration: Benefits Planner: Retirement
- Individual Retirement Arrangements (IRAs) | Internal Revenue Service
- Internal Revenue Service: What If I Withdraw Money From my IRA?
- Smart Asset: What Is the Medicare Eligibility Age?
- Congressional Budget Office: Raise the Age of Eligibility for Medicare to 67
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.