If you have been working for years now, one of the questions you need to ask is, what is the full retirement age? The answer can affect your pension plans, savings, retirement plan, and benefits. To learn more, read below.
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What Is the Full Retirement Age? Here’s the Answer
What is the full retirement age or the normal retirement age? There are two ways to interpret it: life expectancy, and the best retirement age to maximize your benefits.
In the United States, life expectancy is currently 78.74 years old. For workers who want to enjoy their sunset years, they may retire about 20 to 25 years before that. The question is, will this allow them to take advantage of their retirement benefits?
It then brings you to the concept of full retirement age according to benefits. The term refers to the age a person must reach to receive the retirement benefits. These can include Social Security benefits and various retirement accounts.
Currently, the retirement age can range from 62 to 70 years old. With the legislation that Congress passed in 1983, the government has been raising the retirement age as it relates to Social Security.
Originally, the full retirement age for Social Security was set at 65 years old, allowing early retirement benefits to begin at the age of 62. To retire early means to take 80% of the income one would have received during full retirement age.
Why Is the Retirement Age Increasing?
When you are still part of the labor force, you are probably contributing to retirement accounts. These can be individual retirement account (IRAs) and Social Security. Your company may also have a 401(k) plan. This is in hopes that you will receive a monthly benefit (or a lump sum) once you are ready to leave your work.
For Social Security, the government pools all of the contributions that have been made over time to maximize financial growth.
Sometimes, though, the demand may be higher than the supply. In other words, there are more people retiring than the money available. There is also the issue of inflation. Everyday goods will increase in costs over time. For example, if a type of medicine costs $10 right now, it may be about $15 or even $20 by the time you retire. To give the funds enough time to grow, the government may choose to increase the full retirement age.
Another reason that the government may increase the full retirement age for Social Security is to increase the labor force participation rate. In the United States, there are 76 million baby boomers. With so many retirees, it leaves a big dent in the country’s workforce. It can then have a cascading effect, such as increased labor cost, skill shortage, and a shrinking economy. Increasing the full retirement age for Social Security will encourage many people to work longer.
Retirement Benefits by Birth Year
What is the full retirement age, according to the Social Security Administration? The agency has released a chart that illustrates the benefits that an individual will receive. It also shows the reduction for early retirement determined by the year of birth:
- Those born in 1937 or before can retire with full benefits at age 65 and receive 80% of their benefits if they retire early at the age of 62. This is also the average age of retirement.
- Those born between 1938 and 1942 will have full retirement ages ranging between 65 and 2 months to 65 years and 10 months, with a reduction in benefits of 20.83% to 24.17% for early retirement.
- If born between 1943 and 1959, the full retirement age will range between 66 years and 66 years and 10 months, with a reduction in benefits of between 25% and 29.17% for early retirement.
- If you were born in 1960 or later, your full retirement benefits will not go into effect until the age of 67. Older workers who choose to retire early will see a 30% reduction in their total benefit amount.
- There is an additional benefit for delayed retirement. For individuals who reach the full retirement age of 66 years and 2 months in 2017, they can receive an increase in Social Security benefits of 8% each year they delay their benefits. They can max out this bonus by waiting to claim until age 70 at a 24% higher rate.
If you have a Traditional IRA, you must start to take distributions once you reach 70.5 years old.
What Happens if You Retire Early?
Here is the truth: no one is stopping you from retiring. Some people leave work even before they reach the average retirement age. Even when you are 62 years old, you can still collect some of the Social Security benefits you earned. If you have a Traditional IRA, you can even start withdrawing at 59.5 years old without incurring the penalty. There are other early retirement options.
Remember, though, for each month you retire earlier than your full retirement age, your Social Security benefits will reduce by a fraction of a point. By taking your Social Security retirement early, you will also be eliminating your chance of receiving additional long-term incentive benefits.
If you plan on retiring early and are looking to maximize your benefits, it may be best to have savings in a retirement or other account. You can draw from these alternative accounts until you reach a later age that is optimal to begin claiming your Social Security benefits. It also helps to start building your retirement fund early.
Pros and Cons of Retiring Early
There are both pros and cons to retiring early. The most obvious disadvantage is the reduction in your monthly benefit for Social Security.
The payments are there to give you the same total benefit amount for the length of your retirement. Your monthly payment maybe 20% to 25% less if you retire at the age of 62, but you will be receiving those benefits for a lot longer than someone who waits until 66 or 70 years old to retire.
The payment calculations cover an average life expectancy, and in that calculated time frame, the amount you receive should amount to the same total no matter which age you retire.
For some people, retiring early is a necessity. It can be due to medical conditions, disability, or stress. External factors may also play a role. These include layoffs due to redundancy or reduction in the workforce, winding down of business, change of management, or natural disasters.
Delaying retirement may also be a good option depending on your specific situation. If you are in good health, enjoy your work, or have a job that is less stressful, you may wish to continue to work as a way to keep you active and allow you to take advantage of the delayed retirement credits available to those who choose to take their benefits later. You may also have a financial situation that limits you to only the Social Security benefits you will receive, which you may then need to be higher to cover all your monthly expenses.
What is the full retirement age? The government has the answer, but it is you who decides. Choosing to retire early or to delay your monthly benefit until it is at its highest is a personal decision. It will require careful evaluation of your health, current and future financial situation, and overall retirement goals. Either way, make retirement a part of your financial planning. When necessary, get professional advice. The end goal is to enjoy your golden years and retirement benefits.
When do you plan to retire? Tell us your thoughts in the comments section below.