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How Is the Rule of 85 Applied to Retirement?


In place of a 401(k) plan, your employer may offer a defined benefit pension plan for retirement savings. These plans follow different guidelines for withdrawals, including the rule of 85, which governs what type of payment you’re eligible for should you decide to retire early. However, not every employer follows this rule, so it’s important to understand how it may impact your retirement if you have a pension plan at work that is governed by the rule of 85.

Figuring out when to retire and how much you’ll need when you do so can be challenging. A financial advisor can help you sort through all the variables so you have a clear picture of your prospects.

What Is the Rule of 85?

If you’re looking for a rule of 85 definitions, it’s simply a way to determine pension benefit payments when someone retires early. This rule can be applied to pension plans, in which an employer contributes money on behalf of employees who can then withdraw money from the plan when they retire. If you have a 401(k) or a similar defined contribution plan in which you contribute money toward retirement through elective salary deferrals, this rule doesn’t apply.

The rule of 85 says that workers can retire with full pension benefits if their age and years of service add up to 85 or more. So if you’re 60 years old and you’ve been working at the same company for 25 years then technically, you could be eligible for full pension benefits if you choose to retire early.

This rule is designed to ensure that workers who receive pension benefits are able to claim as much of those benefits as possible if they decide to retire before reaching full retirement age. Typically, retiring early with a pension plan means that your benefits may be reduced to some extent. This is similar to the way Social Security benefits can be reduced if you opt to begin receiving them before your normal retirement age.

Calculating the Rule of 85

The rule itself follows a fairly simple calculation. You just need two numbers to do the math:

  • Your age
  • Number of years of service

The number of years of service you have under your belt becomes important when you want to retire early. Specifically, the sooner you plan to retire, the more years of service you’ll need to satisfy the rule of 85. So if you’re 55, for example, and you’d like to retire then you’d need to have at least 30 years of service to qualify for full pension benefits under this rule.

This is the rule of 85 in a nutshell. But it’s important to understand how your employer applies it if you have access to a pension plan at work.

Rule of 85 Limitations

Asian couple plans their retirementEmployers that offer defined benefit pension plans aren’t required to follow the rule of 85. So if your company doesn’t, the rule won’t be of benefit to you should you decide you’d like to retire a few years ahead of schedule. And even if your company does use the rule of 85, there may be a minimum age you need to meet before it can be applied.

For example, you may need to be at least 60 or 62 before pension benefits can be calculated using the rule. Or your employer may use an entirely different number to determine when you’re eligible to receive full retirement benefits. For example, your age and years of service may need to add up to 90 instead of 85.

If your employer doesn’t follow the rule of 85 to determine when you’re eligible to retire with full pension benefits, it may hinge solely on your years of service. So you may need to fulfill 30 years or more of service to retire early without taking a pay cut in your benefits, regardless of your age.

What to Consider If You’re Subject to the Rule of 85

The easiest way to find out what requirements or restrictions your employer places on pension benefits is to ask. Your plan administrator should be able to tell you if the rule of 85 applies to your pension and if so, whether there are any additional requirements or guidelines you need to meet.

If your employer does follow this rule for pension benefits, it’s important to consider what that means for your retirement strategy. For instance, it’s possible that you may decide to retire a few years earlier if you know you can still collect a full benefit. But it’s also possible that working until full retirement age could result in a larger pension benefit amount overall.

Again, employers can base pension benefits on the years of service. So there may be a difference in the payout you’d receive if you have 23 years of service versus 25 or 27. Playing around with the numbers using an online pension benefits calculator can help you estimate what your benefits may be based on different retirement ages.

It’s also important to think about where pension benefits might fit into your overall retirement income scheme. If you’re planning to take Social Security benefits, for example, you might be wondering whether it makes sense to take them at age 62 if you plan to retire early, wait until full retirement age or delay them even longer. The amount of income you’re receiving from pension benefits could dictate when it’s the best time to take Social Security benefits.

If you’re married, your spouse may have a retirement plan of their own to factor in, such as a 401(k) or an individual retirement account (IRA). Coordinating when to take withdrawals from those accounts alongside defined pension plan benefits and Social Security matters from a tax perspective. Depending on the type of 401(k) or IRA, i.e. traditional or Roth, taking withdrawals and receiving pension or Social Security benefits could increase your tax liability.

Talking to a financial advisor about these kinds of issues can help you decide whether to implement the rule of 85 if you have a defined pension plan and if so, when to do it. A financial advisor can evaluate your overall retirement plan and help you come up with a plan for managing income and taxes.

The Bottom Line

Retirement plan documentsThere are a number of things you should consider as you plan your retirement. Understanding the kind of pension you have – and particularly how much flexibility it affords you in terms of when to retire – is one of the most important. The rule of 85 is something you may only need to take stock of if you have a defined benefit plan at work. If you do have a pension plan, it’s important to understand if this rule applies to you and if so, how to best use it to your advantage for retirement planning.

Tips for Investing

  • Consider talking to a financial advisor about whether early retirement is a realistic goal for you financially and what steps you may need to take to achieve it. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Wondering if you have enough to retire? Our free, easy-to-use retirement calculator can give you a good estimate of your annual, post-tax income upon retirement.

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