What Is the Rule of 85 with Retirement?

Pension plans typically require workers to reach a certain age -- often 62 or 65 -- before they can qualify for full retirement benefits. In certain plans, workers can start drawing pension benefits before that age, but the amount of their monthly benefit is reduced. However, a common early-retirement incentive called the "Rule of 85" makes it possible for workers to qualify for full benefits at a younger age.

Pension plans reduce the benefits for workers who retire early because those workers can be expected to collect benefits over a longer period of time. If a plan assumes, based on its analysis of life expectancies, that the average retiree will live to be 80 years old, someone who waits until age 65 to retire is expected to collect benefits for 15 years, while someone who goes ahead and retires at 58 collects them for 22 years. In an attempt to "even out" the total amount that each worker ultimately receives, the plan gives the 58-year-old retiree a smaller benefit each month.

In any workplace, the oldest and longest-serving employees are usually the most expensive. Those workers have spent decades accruing pay raises, and they may make greater use of health benefits. An employer looking to reduce its labor costs has an incentive to encourage such employees to retire, because that would allow those jobs to be filled with younger, less-expensive workers -- or simply left vacant. (It's illegal for the employer to fire workers because of their age.) But workers have an incentive to stay as long as possible: They want to reach the age for full benefits. So employers include early-retirement incentives such as the Rule of 85 in their pension plans.

In a pension plan with the Rule of 85, workers can retire with full benefits if their age and their years of service add up to at least 85. For example, a 59-year-old person who had been working for his employer for 20 years would not be eligible for full benefits because his age and service time add up to only 79. On the other hand, a 61-year-old worker with 25 years of service would be eligible for full benefits because her numbers add up to 86.

Some plans set a minimum age for receiving full benefits, regardless of a worker's "Rule of 85 number." For example, a plan may say that no one younger than 55 can get full benefits. So a 54-year-old worker who'd been at the company since she got out of college 32 years ago isn't yet eligible, even though her number is actually 86. On the other hand, some plans allow full benefits for anyone who has accrued a certain amount of service time, regardless of age. With a plan that lets any worker collect full benefits after 30 years, a 52-year-old employee with 30 years of service could then retire on a full pension, even though his "number" is only 82.