1. Age 59-1/2: The age you can tap your 401(k) or IRA without tax penalty.2. Age 62: The age you can start collecting Social Security.3. Age 65: The age you qualify for medicare (cuts expenses dramatically)4. Age 67: The present age for "full" Social Security.5. Age 70: The present age for "enhanced" Social Security.6. Age 89: The age your 401(k)/IRA will tap out, if spent using the 5% Rule & Draw at age 59
So when you hit 59, you may be able to retire early and withdraw money from your IRA. Three years later, you hit 62, and qualify for Social security. Two years after that, your spouse hits 59, and she can tap her IRA. Three years after that, she qualifies for Social Security - and you for Medicare. And so on, and so on. These "break points" in retirement can be many!
Needless to say, this adds another level of complexity to the retirement calculations for the 401(k) generation. Our parents got Social Security and a Pension - so they knew exactly how much to expect every month (with cost of living increases) for the rest of their lives. There was no need to "wait" for these breakpoints to occur, and then decide how much to cash in, versus how much to spend.
One additional wrench in the works is that if you want to retire early before age 62, this may affect your Social Security payout. The Social Security Administration has an excellent website (and brochure) that illustrates how this works. In their lexicon, the "retirement" age is the age you collect Social Security (minimum age, 62) while the "Stop Work" age is when you, well, stop working.
As they illustrate:
"If you stop work before you have 35 years of earnings, we use a zero for each year without earnings when we do our calculations to determine the amount of retirement benefits you are due.
Even if you have 35 years of earnings, some of those years may be low earnings years. Those low earnings years will be averaged in, creating a lower benefit than if you had continued to work."
So, if you are counting on that amount of money that your Social Security Statement projects, and you decide to retire, say at age 59 (when you can tap that IRA or 401(k)) you may be in for a surprise at age 62, when your retirement benefits are less than you expected. How does this play out?
For example, at age 54, I have exactly 37 years of work logged by the Social Security Administration, starting at age 17 with the $590 of reported income from the Olde Tyme Gaslight Restaurant and going on until today. Sadly, my peak income was in 1999, which reflects the declining fortunes of the Patent business, as well as the fact I have moved more to a part-time basis.
For me, with declining income in my declining years, going to "Stop Work" may affect my Social Security calculation less dramatically than others. For many people, their last few years of work are their highest earning years, and thus cutting off those years from the Social Security average could dramatically affect their benefits.
Bear in mind, however, that your earnings are "capped" at the cutoff amount (about $108,000 or so, at the time of this writing) so you don't get an extra benefit for those years you earned more than that.
So, how early retirement will affect your Social Security is yet another factor to consider in an already complex equation with multiple variables, and several unknowns.
My gut conclusion, after doing some initial calculations, is that I should work to about age 60 at least, in order to have a comfortable retirement. If I quit work now, I would have to burn through a lot of after-tax savings to make it to 59-1/2. Once there, I would have to burn through my IRA money pretty quickly, until Social Security kicks in three years later, and Mark's IRA kicks in, two years after that. In the meantime, health care costs, even under Obamacare, will continue to rise, until I reach 65, and Medicare kicks in (and even then, there are costs associated with that). Health Care costs - yet another variable.
You know, this 401(k)/IRA thing sounded so simple back in 1978 when it was created. It turns out to be a lot more complicated, once you scratch the surface.