Is It Better to Retire at 65 or 67?

The decision to retire is a significant financial and personal milestone. While the traditional retirement age of 65 remains a common perception, financial planning and benefit structures often extend this consideration to age 67 or beyond. Making an informed choice requires understanding Social Security, healthcare, personal savings, and lifestyle aspirations.

Social Security Considerations

Understanding your Full Retirement Age (FRA) is a primary consideration when deciding when to claim Social Security benefits. For individuals born in 1960 or later, the Full Retirement Age is 67, while for those born between 1943 and 1959, it falls between 66 and 67, depending on the specific birth year. Claiming benefits before your FRA results in a permanent reduction of your monthly payment, whereas delaying benefits beyond your FRA can lead to larger monthly payments.

Claiming Social Security at age 65, two years before the FRA for those born in 1960 or later, means your benefits will be permanently reduced. For instance, claiming at age 62, which is 60 months before an FRA of 67, results in a permanent reduction of approximately 30%.

Conversely, delaying Social Security benefits past your FRA, up to age 70, can substantially increase your monthly payout through delayed retirement credits. For those born in 1943 or later, these credits increase your monthly benefit by 8% for each year you delay, up to age 70. For example, if your FRA is 67 and you delay until age 70, you could increase your monthly benefit by up to 24%. These credits cease accumulating at age 70, so there is no financial advantage to delaying beyond that point.

Healthcare and Insurance Coverage

Healthcare access and costs are a component of retirement planning. Medicare eligibility generally begins at age 65 for most individuals, regardless of their employment status.

Medicare consists of several parts: Part A, Part B, Part C, and Part D. Part A primarily covers inpatient hospital stays, skilled nursing facility care, and some home health and hospice care, and is often premium-free if you or your spouse paid Medicare taxes for at least 10 years. Part B covers doctors’ services, outpatient care, durable medical equipment, and some preventive services, and typically involves a monthly premium. Part D covers prescription drugs and is offered through private insurance plans.

If you retire at 65 but are not yet eligible for Medicare, navigating the period without employer-sponsored health insurance is important. Options for coverage during this gap include COBRA, which allows you to continue your employer’s health plan for a limited time, usually 18 months. Another option is to obtain coverage through the Affordable Care Act (ACA) marketplace, where subsidies may be available based on income and household size. Consider supplemental insurance options like Medigap plans, which work with Original Medicare to cover out-of-pocket costs, or Medicare Advantage (Part C) plans, which are private plans that combine Parts A and B, and often Part D.

Impact on Retirement Savings

The timing of retirement significantly influences the longevity and growth of personal retirement accounts like 401(k)s and IRAs. Retiring at 67 instead of 65 provides an additional two years for these funds to potentially grow through investment returns, as well as an opportunity to make further contributions if you continue working. Delaying withdrawals from these accounts allows the money to remain invested and grow tax-deferred for a longer duration.

Required Minimum Distributions (RMDs) are another factor to consider. These are mandatory withdrawals from most tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, that begin at a certain age. Under the SECURE 2.0 Act, the age for RMDs increased to 73 starting in 2023, and will further increase to 75 in 2033 for those born in 1960 or later. Delaying retirement until age 67 means you would not need to begin taking RMDs for several more years, allowing your savings to continue growing without mandatory withdrawals for a longer period.

Retiring at 65, two years earlier, means you might need to start drawing from your retirement savings sooner to cover living expenses. This earlier depletion of funds could increase the risk of outliving your money, especially if your retirement lasts longer than anticipated. Conversely, working until 67 not only allows for continued contributions and growth but also reduces the number of years you will rely solely on your savings, thereby extending their potential lifespan.

Personal and Lifestyle Factors

Beyond financial considerations, personal and lifestyle factors play a significant role in the retirement decision. Your current health status is an element; if health issues arise, retiring earlier might become a necessity, regardless of financial implications. Good health might enable you to continue working longer, benefiting from additional income and delayed benefit claims. The desire to pursue hobbies, travel, or engage in other leisure activities often drives the decision to retire.

The psychological transition from a working life to retirement is also a notable aspect. Some individuals thrive on the structure and social interaction provided by their careers. An abrupt cessation of work at 65 might lead to feelings of boredom or a lack of purpose. Continuing to work, even part-time, until age 67 or beyond can provide a smoother transition, allowing for a gradual shift in routine and identity. Family needs, such as caring for grandchildren or elderly parents, can influence the ideal retirement age, prompting some to retire earlier for caregiving responsibilities or later to provide financial support.