Retire at 65 ... Or Not?
Your assets matter more than your age.
Isn’t 65 the traditional retirement age? Perhaps, but baby boomers are modifying the definition of a traditional retirement (if not redefining it altogether). The Social Security Administration has subtly revised its definition of the traditional retirement age as well.
If you glance at the SSA website, the "full" retirement age for Americans born from 1943-1954 is 66, and it is 67 for those born in 1960 and later. (The "full" retirement age increases gradually from 66 to 67 for those born during the years 1955-1959.)1
When Social Security started, the national retirement age was set at 65. In 1940, a 21-year-old American man had a 54% chance of living another 44 years (according to the federal government’s actuarial estimates). By 1990, that chance had improved to 72%. For 21-year-old women, the probability of reaching age 65 increased from 61% to 84% in that same time frame. Americans also began living longer after 65. Increased longevity led to financial dilemmas for Social Security and the necessary redefinition of "traditional" retirement age.2
What do you lose by retiring at 65? The financial opportunity cost is considerable, and maybe greater than some baby boomers realize. If your full retirement age is 67, you’ll reduce your monthly Social Security income by around 13.3% if you start taking benefits at age 65.6 Moreover, for every year that you refrain from claiming Social Security until age 70, your Social Security benefits will rise by 8%.3
In addition to trimming your long-term retirement benefits, you may also forfeit some salary. But that isn’t all. If you are at or near your peak earnings level, then continuing to work can replace your lowest-earning years with higher earnings in the formula that Social Security uses to calculate the baseline for your monthly benefits (assuming your salary is under Social Security’s taxable limit). In that case, any percentage increase you receive for delayed retirement will be applied to that higher baseline number.7
Think of life after 65 as your "third act" that needs funding. Do you think of 65 as late middle age? It may be. As the SSA website notes, about 25% of today’s 65-year-olds should live to age 90. About 10% of them should reach age 95. Even if that doesn’t happen for you, you should know that the average 65-year-old today can expect to live into his or her mid-eighties.4
Let those statistics serve as a flashing red light, illuminating two new truths of seniority. The first truth: for many Americans, "retirement" will represent 10, 20 or even 30 years of activity and opportunities. The second truth: to stay active and pursue those opportunities, retirees will need 10, 20 or 30 years of financial stability.
Most Americans haven’t amassed the equivalent 10, 20 or 30 years of retirement savings. Many want to "stay in the game" a little longer: a 2018 Gallup poll found that Americans expected to retire at age 66, compared with age 63 in 2002.5
How many Americans can work full-time until age 65? According to Gallup, the average retirement age in America has been 61 since 2011. An Employee Benefit Research Institute survey from 2018 reported that, while 48% of workers expect to retire after age 65, only 19% of workers actually work past that age. It might be due to good fortune, such as better-than-expected savings or an inheritance. On the other hand, many retire early in order to care for a sick loved one or because of a downturn in their own health.5
When should you retire? If that question is on your mind to any degree, consider an evaluation of your retirement readiness - a review of what you have, an estimation of what you need and a clear look at the possibilities before you. It should be time well spent.
Citations.
1 - ssa.gov/retire2/retirechart.htm
2 - ssa.gov/history/lifeexpect.html
3 - money.usnews.com/money/blogs/on-retirement/2013/10/18/why-65-is-too-young-to-retire
4 - ssa.gov/planners/lifeexpectancy.htm
5 - money.usnews.com/money/retirement/aging/articles/the-ideal-retirement-age-and-why-you-wont-retire-by-then
6 - ssa.gov/oact/quickcalc/earlyretire.html
7 - ssa.gov/OACT/COLA/Benefits.html
