The ideal retirement age is no longer 65. A recent Gallup poll of 1,019 adults found that Americans are now hoping to retire at an average age of 66. This is a significant change from as recently as 10 years ago, when more people hoped to retire before age 65. Here's a look at what leaving the workforce at age 66 means for your retirement finances.
No Social Security reductions. The Social Security full retirement age is 66 for baby boomers born between 1943 and 1954. This is the age when baby boomers are eligible to collect the full Social Security benefit they have earned. However, there is also an opportunity to get bigger monthly payments by delaying claiming Social Security between ages 66 and 70. "Assuming life expectancy is going to be long, delaying is usually a better strategy in terms of getting more money," says Matthew Hague, a certified financial planner at Guide Wealth Management in New York. "But if you are not in good health, then delay might not be the best strategy."
Working in retirement. If you work and claim Social Security benefits at the same time before your full retirement age, part or all of your Social Security benefit could be temporarily withheld. However, once you turn your full retirement age, there is no withholding if you work while also receiving Social Security payments. "Social Security may not be enough to maintain the lifestyle that you really intended to pursue," says Sally Balch Hurme, author of "Get the Most Out of Retirement." "A part-time job may give you the money to save for the trip that you really otherwise couldn't afford or to be able to splurge on your grandkids. Extra money makes it more comfortable to buy those extra special things without cutting into your ability to pay your rent and your utilities and buy groceries."
401(k) and IRA withdrawals allowed but not required. Retirees in their 60s have an opportunity to begin taking penalty-free retirement account withdrawals, but are not yet required to do so. The 10 percent penalty for 401(k) and IRA withdrawals no longer applies after age 59½. However, retirement account distributions aren't required until after age 70 ½. Some retirees choose to delay traditional retirement account withdrawals, and the resulting income tax bill, as long as possible to give their money more time to grow before being taxed. However, retirees with large retirement account balances might be able to pay a lower tax rate on 401(k) or IRA withdrawals by starting the distributions in their 60s before claiming Social Security, pension or other sources of retirement income that might push them into a higher tax bracket.
Remember to sign up for Medicare at 65. You don't need to sign up for Medicare and Social Security at the same time. You are first eligible to sign up for Medicare during a seven-month window that begins three months before the month you turn 65. Medicare parts B and D both have late enrollment penalties that are permanently added to your premiums if you delay signing up. If you continue to work at a job with a group health insurance plan after age 65, you need to sign up for Medicare within eight months of leaving the job or the coverage ending to avoid the late enrollment penalty. Also, while most retirees have their Medicare Part B premiums withheld from their Social Security checks, seniors who delay claiming Social Security past age 65 will be billed for their Medicare premiums.
Watch out for forced early retirement. While many workers are now aiming to retire at age 66, when you retire is not always a choice. A buyout, business closure or health problem might cause you to retire ahead of schedule. Retirees left their jobs at an average age of 61, five years earlier than current workers would like to retire, the Gallup survey found. "The job market is not always stable, and there's the potential to get an early retirement package or develop a health concern," says Brent Sutherland, a certified financial planner at Ntellivest in Pittsburgh. "Life might throw a curve ball at you before your expected retirement age."
Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."
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