Turning 55 in 2016? Here's What You Need to Know

The road to retirement has several age milestones, including 55. Photo: 401kcalculator.org via Flickr.

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There are several important ages on the road to retirement. For example, once you reach age 59 1/2, you're allowed to use your retirement savings whenever you like. And at 62, you become eligible for Social Security benefits. One important but lesser-known age that's relevant to your finances is age 55. Not only is this the age at which you first qualify for many "senior citizen" discounts and benefits, but there's also a special rule regarding retirement savings that applies once you reach this age.

Take advantage of the discounts and privilegesAs I mentioned, 55 is the age at which you're considered to be a senior citizen -- at least in the eyes on many businesses offering discounts. Being labeled a senior citizen might make you feel old, but you should still take advantage of the perks. For example, you can now get discounts on:

  • Restaurants.
  • Entertainment.
  • Groceries.
  • Retailers.

For example, Kohl's offers 15% off to customers over 55 every Wednesday. And, many popular grocery store chains offer "senior days" either weekly or monthly, where you could save 5%-10% of your grocery bill. For a more complete list, here's one from The Senior List.

In addition, at 55, you can choose to live in an "active adult community," and there could be many more perks depending on where you live. In fact, many colleges and universities even offer free tuition to seniors.

If you plan on retiring early, or just want to use some of your savingsPerhaps the most significant thing that happens at 55, at least from a retirement standpoint, is that the "separation from service" rule kicks in and allows you to dip into your retirement savings penalty-free, provided certain conditions are met.

In general, if you withdraw from your retirement savings before reaching age 59 1/2, you'll have to pay a 10% early withdrawal penalty. However, this exception says that if you stop working for your employer for whatever reason during the year in which you'll turn 55 (50 for certain public-safety employees), you're then free to use your retirement savings.

Before you go running to your plan administrator and collecting a check, there are a few things you should know.

  • First of all, this rule applies to qualified retirement plans, including 401(k), 403(b), and 501(a) plans, but does not include IRAs. It also doesn't apply if you roll over the money in your employer's qualified retirement plan to an IRA. Doing so will void this exception.
  • Second, you must terminate employment with the employer who sponsors the retirement plan. You cannot continue to work for that employer and withdraw from the employer's retirement plan. You also need to leave in the year you'll turn 55 or later. You can't quit your job at, say, age 51, wait until 55, and then begin to enjoy penalty-free withdrawals under this exception. Now, that's not to say you need to retire or stop working altogether to qualify -- you're free to leave your job and start a new one with a different employer.
  • Third, keep in mind that you'll still need to pay taxes on the money you withdraw, unless your retirement funds are held in a Roth account. This is an important point, especially if you continue to work, because your retirement withdrawals could combine with your income to catapult you into a different tax bracket.
  • Finally, if you plan on retiring early, there are a few other things to consider. You won't be eligible for Social Security until age 62, so your income requirements will be higher in the meantime. And unless you have the ability to keep your health insurance after you retire, be sure to account for this expense. The Affordable Care Act has made healthcare for senior citizens more, well, affordable, but this expense can still be quite a burden on early retirees.

An important milestoneTurning 55 is when many people and businesses consider you a senior citizen. At this age, it becomes easier to use your retirement savings to retire early or to cover any other financial needs. That ability can useful, but make sure you know all of the rules and drawbacks before you decide to use it.

The article Turning 55 in 2016? Here's What You Need to Know originally appeared on Fool.com.

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