The perils of retirement at age 65

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Age 65 is the year we traditionally associate with retirement, but this age is declining in significance. Only one major retirement benefit still kicks in at this age, and plenty of people aspire to retire at both earlier and younger ages. Here's a look at why age 65 no longer resonates as a target retirement age:

[See: 10 Numbers Everyone Should Know About Social Security.]

You won't qualify for full Social Security benefits. While you can begin Social Security payments as early as age 62, you won't get the full amount you have earned unless you sign up at your full retirement age. The full retirement age used to be 65 for people born in 1937 or earlier, but has since been increased to 66 for most baby boomers and 67 for everyone born in 1960 or later. If you claim your Social Security benefit at age 65 you will get a reduced monthly payment compared to waiting until your full retirement age. For example, a worker born in 1965 will get 13.3 percent smaller monthly payments if he signs up at age 65 instead of waiting until his full retirement age of 67. Spousal benefits are also reduced if you claim them at age 65. While spouses are entitled to 50 percent of the higher earner's benefit payment if it's more than they can get based on their own work record, if you begin receiving spousal payments at age 65 you will get only 41.7 percent of the higher earner's payments.

You have a small window in which to sign up for Medicare. Perhaps the most compelling reason to retire at age 65 is Medicare eligibility. Once you turn 65 you no longer need to hold on to a job for the health insurance coverage. You can sign up for Medicare beginning three months before your 65th birthday and start coverage the month you turn 65. It's important to sign up during the seven-month window around your 65th birthday, because your Medicare Part B and D premiums can be increased if you enroll later. Beginning the month you turn 65 there is also a six-month Medigap enrollment period during which you can buy any Medigap policy sold in your state. If you don't sign up then you could potentially be charged significantly higher premiums or even denied coverage. If you are still working at age 65 and have a group health plan through your or a spouse's job, you should sign up for Medicare within eight months of leaving the position or health plan to avoid the higher premiums.

[See: 10 Ways to Make the Most of Medicare.]

You can start retirement account withdrawals, but aren't forced too. At age 65 you are old enough to avoid the early withdrawal penalty on 401(k) and IRA distributions. The 10 percent penalty is typically no longer applied to retirement account withdrawals once you turn age 59 1/2. However, you will have to pay income tax on your withdrawals from traditional 401(k)s and IRAs. But 65-year-olds are not yet required to withdraw money from their traditional retirement accounts. They can continue to defer income tax on their savings and let the money grow for another five years. Distributions from traditional IRAs and 401(k)s become required after age 70 1/2, and a 50 percent penalty is applied to missed distributions.

The length of retirement. If you retire at age 65 and live until 90, you will be retired for 25 years. It can be incredibly difficult to save up enough to pay for over two decades of leisure time. You will also need to manage your money so that it will last throughout that entire period of time, which could include inflation, stock market volatility and health problems or other emergencies that require you to dip into the principal. Working even a year or two past age 65 gives you more time to save, your investments more time to grow, increases your monthly Social Security benefits due to delayed claiming and shortens the period of retirement you need to pay for.

[See: 9 Important Ages for Retirement Planning.]

If you're working primarily for the health insurance you get through your job, retiring at age 65 when Medicare eligibility kicks in can make sense. But if you're interested in timing your retirement closer to the year you max out your Social Security benefit or are required to take retirement account withdrawals, you'll probably need to pick an alternative retirement age.

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