What if I retire at 65 instead of 67?: A Guide to Making Your Decision

For those born in 1960 or later, the full retirement age is 67. The pivotal question of what if I retire at 65 instead of 67 involves weighing reduced Social Security benefits, early access to savings, and managing the healthcare coverage gap before Medicare eligibility.

Quick Summary

Retiring at 65, before your full retirement age of 67, results in a permanently reduced Social Security monthly benefit, though it offers an earlier start to your leisure years. This decision requires careful financial planning to account for a longer period of drawing down savings, bridging the health insurance gap, and managing lifetime income.

Key Points

• Reduced Social Security Benefit: Retiring at 65 results in a permanently reduced monthly Social Security check compared to waiting until your full retirement age of 67.

• Healthcare Coverage Gap: You will need to find health insurance through avenues like COBRA or the ACA Marketplace to bridge the two-year gap before you are eligible for Medicare at 65.

• Impact on Savings: Your retirement savings must last two years longer, which may require a more conservative withdrawal strategy and means two fewer years of compound interest.

• Full Retirement Age for Many is 67: For anyone born in 1960 or later, the full retirement age is 67, not 65, which is an important distinction for calculating benefits.

• Increased Freedom Sooner: Retiring at 65 provides a two-year head start on your retirement, giving you more time for leisure and travel while you are younger and potentially more active.

• No Earnings Limit at Full Retirement Age: If you choose to work part-time after retiring at 67, your Social Security benefits will not be reduced, unlike if you work and collect benefits before your FRA.

• Longevity is a Factor: As average life expectancy increases, you should consider a longer retirement period and how your decision affects lifetime income.

The Financial Realities of Retiring at 65

Retiring two years before your full retirement age (FRA) significantly impacts your finances, requiring careful consideration. Claiming Social Security at 65, when your FRA is 67, results in a permanently reduced monthly benefit. This reduction is approximately 13.3% for those with an FRA of 67. While you receive benefits for a longer duration, the lower monthly amount affects your overall retirement income.

Impact on Social Security Benefits

Social Security benefits are calculated based on your highest 35 years of earnings. Retiring early means you miss two years of potential higher earnings that could replace lower-earning years in this calculation. You also forgo delayed retirement credits available for waiting until age 70, which would further increase your monthly payment.

Accessing Your Retirement Savings Early

Retiring at 65 means drawing from your retirement savings (401(k)s, IRAs) for two additional years. This necessitates a longer lifespan for your nest egg. Traditional withdrawal guidelines, such as the 4% rule, might not suffice for a longer retirement. A more conservative withdrawal strategy is often needed to avoid depleting funds prematurely, and you also lose two years of potential investment growth.

Navigating the Healthcare Coverage Gap

A major consideration for retiring at 65 is healthcare coverage, as Medicare eligibility generally starts at 65. This creates a potential two-year gap between retirement and Medicare. Options to bridge this gap include:

• COBRA: Allows temporary continuation of employer-sponsored coverage, typically for up to 18 months, though you pay the full premium.
• Health Insurance Marketplace: You can purchase plans through HealthCare.gov. Early retirement qualifies you for a special enrollment period, and subsidies may be available based on income.
• Spouse's Plan: Joining a working spouse's employer-sponsored plan may be an option.

The Importance of Enrolling in Medicare on Time

Enrolling in Medicare promptly at age 65 is crucial to avoid potentially higher premiums. Even if still working, consider signing up for the often premium-free Medicare Part A. Consult your company's benefits administrator regarding Part B if you have qualifying employer coverage.

Lifestyle and Longevity Considerations

Your desired retirement lifestyle and increasing life expectancy should influence your decision. Retiring at 65 allows more active retirement years but requires funding a potentially longer period. Consider how health and healthcare costs may change over time.

Comparing Retirement at 65 vs. 67

Consideration	Retiring at 65	Retiring at 67
Monthly Social Security Benefit	Permanently reduced by approximately 13.3%.	Receive 100% of your primary insurance amount.
Lifetime Social Security Income	More payments, but potentially less total income, especially if you have a longer lifespan.	Fewer payments, but higher monthly amounts. May result in higher lifetime income.
Retirement Savings	Must last longer, potentially requiring a more conservative withdrawal strategy.	Two extra years of contributions and investment growth. Shorter withdrawal period.
Health Insurance	Must bridge the gap between retirement and Medicare eligibility with COBRA or Marketplace plans.	Seamless transition to Medicare upon retirement for most.
Working & Earnings	Earnings limit in place before FRA, potentially reducing Social Security benefits.	No earnings limit once you reach your FRA, allowing you to work without benefit reduction.
Flexibility & Freedom	Two extra years of enjoying retirement, travel, and hobbies while you are younger and potentially more active.	More financial security and a higher monthly income, potentially allowing for a more comfortable lifestyle later.

Making Your Final Decision

Your retirement date is a personal choice influenced by multiple factors. Develop a comprehensive financial plan that considers different timelines. Utilize resources like SSA benefit calculators and consult a financial planner for income and expense projections, accounting for inflation and healthcare costs. The financial benefits of waiting may enhance long-term security, while the appeal of early freedom is significant for others.

For more detailed information on your personal Social Security benefit, it is highly recommended to create a personal account on the Social Security Administration's website. https://www.ssa.gov/myaccount/

Conclusion: Your Optimal Retirement Plan

Retiring at 65 offers earlier leisure but results in reduced Social Security benefits and a longer reliance on savings. Waiting until 67 provides greater financial stability with higher monthly income and more time for savings growth. Your decision should balance these financial aspects with your health, lifestyle goals, and priorities to create a personalized retirement strategy.

Frequently Asked Questions

How much less Social Security will I get if I retire at 65 vs. 67?

For those with a full retirement age of 67, retiring at 65 will result in a permanent reduction of your monthly Social Security benefit by approximately 13.3%. The exact reduction percentage depends on the number of months you claim early.

How do I get health insurance if I retire at 65, before I'm eligible for Medicare?

You can bridge the healthcare gap by using COBRA to continue your employer-based coverage, or by purchasing a plan through the Health Insurance Marketplace. Retiring early qualifies you for a special enrollment period to use the marketplace.

Will retiring early affect my spouse's Social Security benefits?

If you are the higher-earning spouse, retiring early can impact your spouse's potential survivor benefit, which is based on your full benefit amount. You and your spouse should discuss how your decisions affect each other's financial security.

Is there a retirement earnings limit if I retire at 65?

Yes, if you continue to work and collect Social Security before your full retirement age, you are subject to an annual earnings limit. If you earn over this limit, your Social Security benefits will be temporarily reduced until you reach your FRA. Once you reach your FRA, there is no limit on what you can earn.

How does retiring early affect my lifetime Social Security income?

The effect on your lifetime income depends on your longevity. If you have a longer than average lifespan, waiting for the higher monthly benefit until 67 or even 70 could result in more total income over your lifetime. If your lifespan is shorter, retiring early provides more total payments.

What's the difference between 'early' and 'full' retirement age?

Early retirement age is 62, the first age you can claim Social Security. Full retirement age (FRA) is the age at which you receive 100% of your benefits (67 for those born in 1960 or later). Claiming at any time before your FRA results in a permanently reduced monthly benefit.

Should I consult a financial advisor before retiring early?

Yes, consulting a financial advisor is highly recommended. An advisor can help you create a detailed plan that considers your savings, withdrawal strategy, health insurance needs, and overall financial goals, ensuring you make the best decision for your situation.

How can I ensure my savings last longer if I retire early?

To stretch your savings, you can adopt a more conservative withdrawal rate, reduce expenses, or explore additional income streams like part-time work or passive investments. A financial planner can help you model different scenarios to ensure your money lasts.