Normal Retirement Age and Minimum-Service Requirement

Regardless of the type of plan, a participant's age at retirement affects benefit levels. Just how those benefits are affected, however, depends on whether the plan includes a minimum-service requirement or specifies a "normal retirement age."

Plans with a Normal Retirement Age or Minimum-Service Requirement

Either a normal retirement age or a minimum-service requirement is an integral part of the benefits formula of any traditional defined-benefit plan, and the formulas of many plans specify both. In private-sector plans, normal retirement ages of 62 or 65 are most common, extending to approximately 70 percent of covered workers. Public-employer plans typically set the normal retirement age at 60. Moreover, unlike most private plans, public plans usually contain an option to retire after a particular period of service--typically 30 years--regardless of age.

Nearly all traditional defined-benefit plans permit early retirement--typically at age 55--with reduced benefits.⁽¹⁾ Reducing benefits by 5 percent for each year below the normal retirement age is common, although plans may vary the percentage by age. Employers can encourage early retirement by making the percentage reduction smaller than the actuarial cost of paying benefits over a longer retirement period. Conversely, they can discourage early retirement by making the percentage larger than the actuarial cost. Historically, employers have tended to subsidize early retirement while providing no bonus for later retirement. Thus, among traditional defined-benefit plans, the incentives are heavily skewed toward early rather than deferred retirement.

Plans Without a Normal Retirement Age or Minimum-Service Requirement

Cash balance plans generally do not specify a minimum-service requirement or a normal retirement age. Instead, an individual's "cash balance" is what it is at retirement, whether taken earlier or later than some typical age. Many employers reportedly find the absence of an early retirement incentive one of the more attractive features of cash balance plans.

Defined-contribution plans, like cash balance plans, rarely specify a normal retirement age. An account's balance is what it is at any given time, and a person can retire whenever he or she deems that balance to be sufficient to maintain the standard of living desired in retirement. People who retire before the age of 59½, however, are likely to be subject to the 10 percent penalty tax unless they select certain distribution options.