Retiring at 60 vs. 65 vs. 70: What Changes?

One of the biggest decisions in retirement planning is when to retire.

For many people, the question is not simply whether they have saved enough. Retiring at 60, 65, or 70 can produce very different financial outcomes because each age affects Social Security, Medicare, taxes, retirement account withdrawals, investment growth, and how long your savings may need to last.

You may have accumulated a healthy 401(k), IRA, investment portfolio, real estate, or other assets and still wonder:

Can I actually afford to retire now?

That question becomes increasingly important as retirement gets closer.

Someone retiring at 60 may need to fund several years of healthcare before Medicare and may want to delay Social Security. Someone retiring at 65 has access to Medicare and has had five additional years to save. Someone working until 70 may have accumulated considerably more while also increasing potential Social Security benefits.

But the largest retirement account does not automatically produce the best retirement decision.

There is no single retirement age that is right for everyone. The goal is to understand how the different pieces of your financial life work together before deciding when you can comfortably step away from work.

Retiring at Age 60

Retiring at 60 can be attractive. You may be ready to leave the workforce, travel, spend more time with family, pursue other interests, or simply enjoy the retirement you have spent decades preparing for.

But retiring at 60 generally requires more planning.

One of the biggest considerations is healthcare. Medicare generally does not begin until age 65. If you retire at 60 and lose employer-sponsored health insurance, you may need to fund approximately five years of healthcare coverage before becoming eligible for Medicare.

Depending on your circumstances, that coverage could come through a spouse's employer, COBRA, an individual insurance policy, or the health insurance marketplace.

Healthcare should therefore be treated as part of your retirement budget rather than as a separate expense.

Social Security is another consideration.

At age 60, most people are not yet eligible to begin their own Social Security retirement benefits. This means the first several years of retirement may need to be funded through savings, investments, pension income, rental income, or other resources.

Retiring earlier also means your investment portfolio may need to support you for a longer period.

Someone retiring at 60 could potentially spend 30 years or more in retirement. For someone who lives into their 90s, the retirement period could approach the length of their entire working career.

That makes investment allocation, inflation, withdrawal rates, healthcare costs, and tax planning particularly important.

The Financial Bridge From 60 to 65

One useful way to think about early retirement is to divide retirement into different stages.

For someone retiring at 60, the first stage may be the period between retirement and Medicare eligibility.

During these years, you need to determine:

• Where your monthly income will come from.

• How you will obtain healthcare coverage.

• Whether you should begin Social Security when eligible or delay it.

• Which investment accounts you should use first.

• Whether Roth conversions make sense.

• How much cash you should maintain.

• How much investment risk is appropriate.

Rather than simply withdrawing a fixed amount from your 401(k) every year, it may be beneficial to develop a coordinated strategy across your different accounts.

This period can also provide valuable tax-planning opportunities.

Early Retirement Can Create a Tax-Planning Window

Many people spend their highest-earning years contributing to traditional 401(k)s and IRAs.

Those contributions may reduce taxable income while you are working, but eventually the money generally becomes taxable when it is withdrawn.

When you retire, your employment income may suddenly disappear.

Suppose you retire at 60 and decide to delay Social Security. Your taxable income could be considerably lower than it was during your working years.

This may create an opportunity to strategically withdraw money from traditional retirement accounts or convert portions of those accounts to Roth IRAs.

The objective is not necessarily to pay the least amount of tax in one particular year.

Instead, the goal may be to evaluate your taxes over your entire retirement.

Paying some tax at a potentially lower rate during your early retirement years could, depending on your circumstances, help reduce large taxable distributions later.

Retiring at Age 65

Age 65 remains an important milestone in retirement planning, largely because of Medicare eligibility.

For someone who has been delaying retirement because of employer health insurance, reaching Medicare eligibility can make retirement considerably easier to plan.

By 65, you have also had five additional years to contribute to retirement accounts and allow your investments to potentially grow compared with retiring at 60.

Those five years can make a significant difference.

You may have:

• Additional 401(k) or IRA contributions.

• Additional employer matching contributions.

• Five fewer years of portfolio withdrawals.

• Additional years of potential investment growth.

• A larger potential Social Security benefit from delaying your claim.

The combination can substantially improve the sustainability of a retirement plan.

For example, someone who retires at 60 may immediately begin withdrawing money from a portfolio.

Someone who continues working until 65 may not only avoid those withdrawals but may continue adding money to the portfolio.

The difference can compound over time.

Age 65 Does Not Automatically Mean Claim Social Security

A common misconception is that retirement, Medicare, and Social Security should all begin at the same time.

They do not have to.

You may retire at 65, enroll in Medicare, and still delay Social Security.

For people with sufficient savings or other sources of income, delaying Social Security may be part of a broader retirement income strategy.

On the other hand, some retirees may benefit from claiming earlier because they need the income or because of their individual circumstances.

Social Security should therefore be evaluated based on your complete financial situation rather than simply because you reached a particular age.

Retiring at Age 70

Working until 70 can significantly change the retirement equation.

Compared with retiring at 60, you potentially have another decade of retirement contributions and investment growth.

At the same time, your investment portfolio has approximately ten fewer years that it needs to support.

That combination can be powerful.

A person working until 70 may also have paid down more of a mortgage, accumulated additional cash reserves, increased pension benefits, or reduced other financial obligations.

Social Security benefits can also be higher for someone who delays claiming compared with beginning benefits earlier.

For people who are healthy, enjoy their work, or simply want additional financial security, delaying retirement can strengthen the overall plan.

But continuing to work until 70 is not necessarily the best choice for everyone.

Retirement planning is ultimately about using your financial resources to support the life you want to live.

If you are financially prepared to retire earlier, working several additional years simply to maximize your investment balance may not align with your personal goals.

Social Security: Retirement Age and Claiming Age Are Different Decisions

Your retirement date and your Social Security claiming date are two separate decisions.

For example, someone might retire at 62 but use investments and savings for several years before claiming Social Security.

Another person might work until 67 but claim Social Security earlier.

A third person may retire at 65, enroll in Medicare, and delay Social Security until 70.

The appropriate strategy depends on many factors, including:

• Your income needs.

• Your retirement assets.

• Your health and longevity considerations.

• Your marital situation.

• Your other sources of income.

• Your tax situation.

• Whether you plan to continue working.

For married couples, the analysis can become even more important because the claiming decisions of one spouse may affect the household's overall retirement income strategy.

Social Security should therefore be incorporated into your complete retirement plan rather than treated as an isolated decision.

Medicare Can Affect Your Retirement Decision

Healthcare is particularly important for anyone considering retirement before age 65.

Before Medicare eligibility, you may need to obtain coverage through a spouse's employer, COBRA, an individual health insurance policy, or the health insurance marketplace.

The cost can be significant and should be included when calculating whether early retirement is affordable.

After Medicare begins, healthcare costs do not disappear.

Retirees may still have Medicare premiums, supplemental insurance, prescription costs, dental expenses, vision expenses, and other out-of-pocket costs.

Higher-income retirees should also be aware that Medicare premiums can be affected by income.

This creates another connection between retirement income planning and tax planning.

Large IRA distributions, Roth conversions, investment gains, or other income may affect more than your income tax bill. They may also have an impact on future Medicare premiums.

Your Withdrawal Strategy Matters

Retirement changes the way you use your investments.

During your working years, you are generally accumulating assets.

You contribute to a 401(k), IRA, brokerage account, or savings account and hopefully allow those assets to grow.

Once you retire, the process begins to reverse. Your accumulated assets may now need to help provide your paycheck.

But deciding which account to withdraw from first is not always straightforward.

You may have money in:

• Traditional IRAs.

• 401(k) accounts.

• Roth IRAs.

• Taxable brokerage accounts.

• Savings accounts.

• CDs or other fixed-income investments.

• Real estate or other assets.

Each type of account can have different tax consequences.

Simply withdrawing money from whichever account is most convenient may not produce the most tax-efficient result.

A coordinated withdrawal strategy can help manage taxable income while allowing other assets to potentially continue growing.

Investment Risk Changes as Retirement Approaches

Many investors focus heavily on investment returns while they are accumulating retirement savings.

As retirement approaches, risk becomes equally important.

A significant market decline at age 45 may be uncomfortable, but you may still have many years of employment and future contributions ahead of you.

A significant decline immediately after retirement can be more challenging because you may simultaneously be withdrawing money from the portfolio.

This is sometimes referred to as sequence-of-returns risk.

The order in which investment gains and losses occur can matter when you are taking withdrawals.

That does not necessarily mean a retiree should move everything into cash or bonds.

A retirement portfolio may still need to grow for several decades.

Instead, the investment allocation should reflect your income needs, risk tolerance, other income sources, time horizon, and the amount of your portfolio you expect to withdraw.

Inflation Matters More Than Many Retirees Expect

Retirement planning should also consider inflation.

Suppose you determine that you need $100,000 per year to maintain your lifestyle when you retire.

That does not necessarily mean $100,000 will be sufficient 10, 20, or 30 years later.

Over a long retirement, rising prices can significantly increase the amount of income needed to maintain the same lifestyle.

This is another reason simply accumulating a large amount of cash may not be enough.

Your retirement plan needs to balance the need for current income with the need for long-term growth.

Required Minimum Distributions Should Be Planned for Before They Begin

Traditional retirement accounts can eventually create another issue: required minimum distributions, commonly known as RMDs.

Depending on your age and applicable tax rules, the government eventually requires you to begin withdrawing money from many tax-deferred retirement accounts.

For someone with a substantial traditional IRA or 401(k), those future distributions could create significant taxable income.

This can sometimes surprise retirees who were focused primarily on accumulating as much as possible in tax-deferred accounts during their working years.

This is why retirement tax planning should ideally begin well before RMDs start.

The years between retirement and RMD age may provide opportunities to manage retirement account balances through strategic withdrawals or Roth conversions.

Don't Forget About Real Estate and Other Assets

Retirement planning should not be limited to retirement accounts.

Many retirees have a significant portion of their net worth tied up in their home or investment real estate.

Rental properties may provide retirement income, but they also come with expenses, maintenance, taxes, vacancies, and management responsibilities.

Your primary residence may also become part of your retirement strategy.

Some retirees choose to pay off their mortgage before retirement. Others downsize, relocate, or eventually use home equity to help support retirement.

These assets should be incorporated into the retirement analysis along with your investment portfolio.

The Difference a Few Years Can Make

Imagine two people who each have the same amount saved at age 60.

One retires immediately.

The other continues working until 65.

The person who continues working potentially receives five additional years of investment growth, makes five more years of retirement contributions, and avoids five years of withdrawals.

Working until 70 extends that difference even further.

However, there is another side to the equation.

The person who retires at 60 receives five or ten additional years of retirement time.

That time may be extremely valuable.

This is why retirement planning should not simply answer:

How can I accumulate the most money?

A better question is:

At what point have I accumulated enough to comfortably support the retirement I want?

Retirement Planning Is About Cash Flow, Not Just Net Worth

A person can have a high net worth and still experience retirement income problems.

For example, someone may own a valuable home and have substantial retirement assets but very little accessible cash flow.

Another retiree may have a smaller portfolio but significant Social Security, pension, and rental income that covers most of their expenses.

That is why we look at retirement as an income-planning problem as well as an investment-planning problem.

Your retirement assets need to work together to provide the income you need while managing taxes and maintaining sufficient resources for the future.

Taxes Should Be Part of the Decision

Taxes are sometimes overlooked when deciding when to retire.

Your tax situation may change significantly once your paycheck stops.

During retirement, your income could come from Social Security, pensions, IRA distributions, investment income, rental property, or other sources.

Each may receive different tax treatment.

There may also be years when your taxable income temporarily falls after retirement.

Those years can potentially create planning opportunities that were not available while you were earning a full salary.

Looking at taxes over many years rather than focusing only on the current year can help produce a more efficient retirement income strategy.

What About Leaving Money to Your Family?

Retirement planning is not always solely about making sure your own expenses are covered.

Many people also want to leave assets to children, grandchildren, charities, or other beneficiaries.

If leaving a legacy is important to you, that goal should be incorporated into your retirement projections.

For example, your investment strategy may be different if your objective is simply to make your assets last throughout your lifetime compared with someone who wants to preserve a significant portion of the portfolio for the next generation.

Estate planning, beneficiary designations, retirement account taxation, and investment strategy can all become part of the conversation.

So, Should You Retire at 60, 65, or 70?

The answer depends on much more than your age.

Before deciding, consider:

• How much you expect to spend in retirement.

• How much you have accumulated.

• Your Social Security benefits.

• Pension or other guaranteed income.

• Healthcare costs.

• Your investment allocation.

• Your tax situation.

• Your mortgage and other debts.

• Rental or other income.

• Your expected retirement lifestyle.

• Whether leaving an inheritance is important to you.

• How long your portfolio may need to support you.

Most importantly, retirement planning should answer a practical question:

If I retire now, can my income and assets reasonably support the lifestyle I want for the rest of my life?

If the answer is not yet clear, running retirement projections at several different ages can be extremely helpful.

You may discover that working one or two additional years significantly improves your financial position.

Or you may discover that you are already financially prepared to retire and that continuing to work is a personal choice rather than a financial necessity.

That is ultimately what a good retirement plan should help you understand.

How Pacific Tax and Investments Can Help

At Pacific Tax and Investments, we help clients look at retirement from a complete financial perspective.

Rather than focusing only on an investment account balance, we look at your retirement savings, investment allocation, Social Security, pensions, real estate, expected expenses, taxes, healthcare considerations, and long-term financial goals.

We are fiduciaries as well as tax professionals, which allows us to incorporate both investment planning and tax planning into the retirement process.

We can also model different retirement scenarios to help answer questions such as:

What happens if I retire at 60 instead of 65? Should I take Social Security now or wait? How much can I reasonably withdraw from my portfolio? Should I consider Roth conversions? How could taxes change throughout retirement?

Retirement is one of the biggest financial transitions most people will make. Having a coordinated plan can help you understand not only whether you have accumulated enough, but how your assets can work together to support the retirement you have been planning for.

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