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The ideal age to retire differs for everyone. For most working adults, it’s a target date that is dictated by their savings, health, and individual financial goals.
But even those with adequate savings often delay their departure from the workforce until they reach specific milestones.
For example:
- Many focus on age 65 when they become eligible for Medicare, the federal health insurance program for those 65 and older and younger individuals with permanent disabilities.
- Others hold out for their full retirement age when they can begin collecting their full Social Security benefit, which is either age 66 or 67 depending on the year they were born.
It may surprise you to learn, however, that if you have diligently saved, you could potentially reduce your longevity risk, or the risk of outliving your savings, by retiring sooner.
“We call the five years before and immediately after you retire the retirement red zone, where the downside risk of losses in your investment portfolio far outweigh the upside potential for gains,” Will Pfeifer, a financial professional with GoldBook Financial in Scottsdale, Arizona, explained. “If you’re in a position where you have enough saved, the more prudent plan may be to protect what you have by retiring earlier during periods of market stability.”
Indeed, sequence of returns risk, or the order in which your investment returns occurs, is real. Those who rely on their investment portfolio for living expenses and experience negative market returns just before they retire or in the first few years of their retirement face a far greater chance of outliving their assets. (Related: Beware retirement’s overlooked risk: Sequence of returns)
Why? Opportunity cost.
By taking withdrawals from your retirement portfolio when your account value has declined, you lock your losses in and deprive those dollars a chance to deliver compounded future returns — growth that might otherwise help to mitigate the long-term effects of inflation.
Thus, if you delay retirement until age 65, 66, or 67, your portfolio could be worth less than it was two or three years prior, depending on market performance, forcing you to reduce your annual withdrawal rate to make ends meet. Or, your account value might simply remain stagnant, despite the additional years of contributions you made to your pretax retirement account.
“There’s a risk in not capturing what you already have and protecting it,” said Pfeifer. “If you work another year, it may not make that much difference financially depending on how the market performs.”
While most financial professionals recommend against trying to time the market where investments are concerned, those on the cusp of retirement should at least consider the potential for downside risk when determining the best age to retire, said Pfeifer.
“Our goal is not to die bazillionaires,” he said. “Our goal is to have a successful retirement. We try to educate people that they should retire when it’s financially prudent.”
Is age 63 1/2 the right time to retire?
Pfeifer said that he encourages many of his clients who have reached their retirement savings goal to at least consider the option of retiring at age 63-1/2, a potential sweet spot for several reasons.
For starters, that’s only 18 months away from Medicare eligibility, not long to have to shoulder the added cost of private health insurance.
“People are so worried about waiting for Medicare at age 65, but they forget that they may actually be able to take COBRA for health insurance before Medicare,” Pfeifer said. “If you’re paying out-of-pocket for COBRA for 18 months, that may cost you an additional $18,000 total, which might just be statistical noise in terms of your long-term financial plan. You were going to pay something for Medicare anyway, because it’s not free. When we explain this to some of our clients, it speeds up their retirement timeline.”
The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives certain workers and their families who lose their group health insurance benefits due to voluntary or involuntary job loss the right to continue their coverage for a limited period of time — between 18 and 36 months depending on the circumstances.1
Continued health insurance coverage under COBRA is often more expensive than you would pay while employed, because you would typically be paying for both your own share of the costs and also the portion that your employer previously paid through your benefits package. As such, it is important to compare benefits and costs (premiums, deductibles, copayments, and out-of-pocket maximums) with alternative coverage options. (Related: Retiring early? A guide to health insurance options)
Sid Warrenbrand, a financial professional with Baystate Financial in Boston, Massachusetts, pointed out some states offer private medical insurance to eligible residents for about the same cost as Medicare.
“It varies state by state,” he said. “We recommend that folks who are within five to 10 years of retirement drill down and do the math on what those health insurance costs will look like for them pre-Medicare.”
Can I retire at age 55?
For some workers who are able to make early penalty-free withdrawals from their retirement account, age 55 could potentially be the right age to call it quits.
Indeed, those who withdraw money from their 401(k), traditional IRA, and other tax-deferred retirement accounts before age 59½ typically get hit with a 10 percent early withdrawal penalty on top of the ordinary income tax all retirees pay on distributions from tax-deferred accounts.
As such, most financial professionals, including Warrenbrand, typically recommend that you wait until you turn 59½ to begin pretax withdrawals.
In certain cases, however, you may be able to begin withdrawals earlier and avoid the penalty.
“Depending on their employer, a lot of people at 55 are pension eligible and just don’t realize that they can get penalty-free access to their retirement funds,” said Pfeifer, noting that an early retirement is only recommended for those with sufficient savings and guaranteed income streams to cover their projected living expenses. That includes out-of-pocket health care costs, which often rise substantially as we age. (Learn more: How much will I really need for health care in retirement?)
Separately, the Internal Revenue Service allows workers who turn 55 (or older) in the year they leave or lose their job to begin taking distributions from their 401(k), 403(b), or 403(a) plans penalty-free.2 You will still owe ordinary income tax on the amount withdrawn because those savings have never been taxed.
Under the IRS provision, sometimes referred to as the rule of 55, you may continue taking penalty-free distributions from your retirement account even if you later get another job.
“This is a major exception for those who retire before age 59½,” said Pfeifer. “You can actually, in certain cases, take money out of your 401(k) without paying a penalty.”
Take note that the rule of 55 only applies to:
- 401(k), 403(b), and 403(a) accounts, but it does not include individual retirement accounts (IRAs). As such, you must leave the balance of your tax-deferred account with your former employer while you take withdrawals. Any amount rolled over to an IRA would revert to the 59½ year rule and be ineligible for early penalty-free withdrawals.
- The tax-deferred retirement account you were contributing to at the time you left your job, so don’t start dipping into your accounts from prior employers if you hope to avoid penalties.
Retiring at age 50: Public safety workers
Public safety workers may be eligible to begin penalty-free withdrawals from their retirement accounts even earlier, in the year they turn age 50.3
According to the IRS, those include specified federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers.
Social Security should wait
Regardless of when you call it quits, most financial professionals generally recommend waiting to claim Social Security until at least your full retirement age when you can collect the full benefit to which you are entitled — especially those who are in good health and/or have a family history of relatives living into their 90s.
If you delay benefits beyond your full retirement age, you will receive credits that increase the size of your monthly benefit, until age 70 when the benefit of delaying any longer disappears. (Learn more: When should I file for Social Security retirement benefits?)
That said, those with a health condition, family history of premature death, or immediate need for retirement income may instead make the decision to claim Social Security sooner, which would permanently reduce the size of their monthly benefit.
A financial professional can help you make an informed decision about when to begin claiming Social Security based on your unique circumstances. They can also offer valuable guidance on ways to cover your living expenses before Social Security kicks in.
Tips to combat financial headwinds
It’s important to note that early retirees are at greater risk of outliving their assets because their savings must last longer.
In some cases, they can help counter the financial headwinds by maintaining an oversized emergency fund or pool of liquid assets, including cash and money markets, from which to draw during periods of market decline, giving their investment portfolio time to recover. Cash value from a permanent life insurance policy can also help in this regard. (Learn more: How life insurance can help supplement retirement income)
Pfeifer said that annuities can also potentially help early retirees cover their living expenses until other guaranteed sources of income kick in, which may include pensions and Social Security. Annuities are insurance contracts that pay out an income stream in exchange for an upfront payment. They can be structured to provide an income stream for life, or, for those with a short-term income need, for only a fixed number of years.
For those looking to minimize their tax bill during retirement, a qualified longevity annuity contract, or QLAC, could potentially make sense, said Pfeifer. A QLAC is a type of deferred annuity that provides a guaranteed lifetime income stream and can be purchased with money from traditional qualified retirement accounts, such as a 401(k), 403(b), or IRA. As such, they may enable you to defer a portion of your required minimum distributions (RMDs) and their associated taxes to as late as age 85. (Learn more: What is a QLAC? How can it help with RMD rules?)
Typically, you must begin taking RMDs by age 73. The age limit for RMDs climbs to 75 effective January 1, 2033. RMDs are taxed as ordinary income. (Related: Turning 73? RMDs explained)
The financial risks of an early retirement
It is important to note that dipping into your retirement savings before the traditional age of retirement puts you at greater risk of outliving your assets. Indeed, an early retirement is best left to those who have done the math and have a sound strategy for making their savings last.
Regardless of how your investment portfolio performs, working longer by even a few extra years may enable you to pay down more of your mortgage, pay off other debt like your car loan, and complete costly repairs to your home, any of which could help you enter retirement in a position of financial stability. Working longer may also enable you to delay claiming Social Security, which permanently boosts the size of your future benefit. (Learn more: A checklist for early retirement)
A financial professional can provide a holistic review of your retirement savings, income streams, protection products (health, life, disability income, and long-term care insurance), expenses, and future goals to help you determine the retirement age that’s right for you.
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1 U.S. Department of Labor, “COBRA Continuation Coverage.”
2 Internal Revenue Service, “Retirement topics: Exceptions to tax on early distributions,” Aug. 29. 2023.
3 Internal Revenue Service, “Retirement topics: Exceptions to tax on early distributions,” Aug. 29. 2023.