If you live in the U.S., your full retirement age is usually the age at which you can begin receiving all Social Security benefits to which you are entitled. The full retirement age depends on your birth year. To make things even more confusing, the IRS has its own definition of retirement age, which has tax implications when you start withdrawing your retirement funds. If you work for the government, your retirement benefits may be paid at different ages depending on your employment.
But don’t worry. We break down the pros and cons of retirement associated with Social Security benefits, the IRS, and different careers. Read on to find out when you’re eligible for certain retirement benefits and how to start planning for the day now.
Social security retirement age
Since 1935, the Social Security Administration (SSA) has set the full retirement age at 65. However, in 1983 the SSA decided to increase the retirement age to 67, citing the longer life expectancy of older adults. Instead of changing the age suddenly, they created a system that slowly increased the age from 65 to 67, gradually increasing a person’s retirement age based on birthdays. It is often helpful to refer to the SSA’s full pension table to determine your retirement age, but here’s a quick summary:
- If you were born between 1943 and 1954, your full retirement age is 66.If you were born in 1960 or later, your full retirement age is 67.
- If you were born in 1960 or later, your full retirement age is 67.
- If you were born between 1955 and 1959, your full retirement age will increase by two months each year from age 66 from 1955. If you were born in 1955, your full retirement age is 66 years and two months; if you were born in 1957 (two years later than 1955, thus adding four months), your full retirement age is 66 Years and six months.
- If you were born in 1960 or later, your full retirement age is 67.
Early retirement
You don’t have to wait until your Social Security retirement age to stop working and start collecting your benefits. Early retirement is also an option worth considering. The SSA allows anyone over the age of 62 to begin claiming Social Security benefits.
However, if you retire early, your benefits from the SSA will be reduced. The total amount you receive is reduced by a certain percentage each month, taking into account the number of months you retire before full retirement age.
Generally speaking, the earlier you retire, the less benefit you will receive. For example, if you retire 5 years early, your income will be 30% less than at full retirement age. People who retire three years early will get more benefits than you, but still less than they would get at full retirement age.
Late retirement
The SSA also allows individuals to defer receiving Social Security benefits until age 70. If you receive a pension at that age, you can receive up to 132% of your monthly pension at your stated full retirement age.
However, if you postpone your retirement age past 70, your pension amount will not increase. So delaying retirement further in order to get more money may not be worth it.
SSA calculates your Social Security benefits based on your highest indexed income over 35 years of service. So, if you started working later than your peers or earned less in your earlier years, you can defer collecting your Social Security benefits until age 70.
Calculation of Social Security Benefits
Before you decide if you should retire and start claiming Social Security benefits, figure out how much you’ll get each month. By creating an account and registering with My Social Security, you can use the SSA calculator online to determine your age-based benefits.
The calculator takes your gross income into account and provides various pension estimates. You can then decide when to retire based on your preferred options.
IRS full board
The Internal Revenue Service (IRS) defines full retirement age differently than the SSA. And that age determines whether you can use the tax benefits of a qualifying superannuation account when you make withdrawals.
Typically, the IRS sets 59.5 as the age at which you can start taking out annuities or annuities. If you withdraw investment income before that age, you may be subject to an additional 10% early distribution tax penalty from the IRS.
There are exceptions to this rule. For example, if you quit your employer after age 55 (which means you quit or were fired), you can deduct your 401(k) income without penalty. If you’ve worked in public security, such as police, ambulance, and corrections, you can retire at 50 with similar privileges.
Federal employee benefits
Given the strong demand for some federal jobs, the federal government defines the full retirement age differently for different occupations. Also, jobs that allow you to contribute to Social Security and other pension plans can give you access to pensions if you retire early. Your Social Security benefits will continue to be in effect until you reach full retirement age.
The national minimum retirement age for employees born in 1970 and later is currently 57. However, various public agencies have their own rules for when employees can retire and under what conditions they can receive full retirement benefits. These benefits include Social Security benefits, Federal Employees Retirement System (FERS) pensions, and tax-advantaged retirement account investments. How much benefit you get each year depends on how much you earn and pay, and how long you work.
Say you work as an air traffic controller in the federal government. In this case, the Federal Aviation Administration (FAA) set the mandatory retirement age at 56, six years earlier than the early retirement age. That’s because it’s a high-pressure job. You can even retire early if you serve at least 25 years.
After working for the federal government for at least 20 years, you can get some federal benefits to help you pay your bills until you can get Social Security benefits. However, the formula used to calculate your benefits depends on the year you started working and which pension plan you belong to.
For law enforcement officers, the full retirement age is 57. If you start your career later, you will have to retire early, but you can retire after 20 years of service. On the other hand, if you started work earlier and completed at least 25 years, you can retire before age 57.
If federal agencies require retirement before age 62, the federal government provides a stipend or annuity to fill the gap until Social Security benefits begin. The amount you get depends on your payment system and your maximum earnings while working.
For example, if you work under the Federal Pension Plan (FERS), your maximum earnings (base salary) are averaged over the course of your career for three consecutive years. The system then multiplies it by 1.7% and 20 years of work. So if your top three earn an average of $50,000 a year, your accumulated annual gain over 20 years would be $17,000 a year.
In addition, for any service over 20 years, you will receive an additional 1% of the first 3 years of average earnings multiplied by the first 20 years of service. For example, if you worked for 25 years and your top three annual earnings averaged $50,000, you would earn an extra $2,500. So your total annual benefit is $19,500.
Private pension plan
Private pension systems are typically funded from employee and employer contributions to qualifying and ineligible accounts. Interest is earned from there over time. If you retire early, you can withdraw money from these accounts without penalty as long as you meet the IRS’s withdrawal criteria. These retirement funds can help you live comfortably until you reach Social Security benefit age.
