Thinking About Retiring at 65? It might be harder and not as smart as you think.
As we live longer, our retirements are becoming longer, which means people collect Social Security for longer. The so-called full retirement age (or FRA) for people born before 1937 is 65. For people born after 1937 their FRU increases based on the year they were born up to age 66 and 10 months for someone born in 1959. And if you were born in 1960 or later, your full retirement age is set at 67. Who knows how the government and the SS administration will adjust FRA in the future.
Sixty-five has long been the magic age for retirement. But the reality is that the expected age of retirement is becoming more diverse for the majority of non-retired U.S. adults, according to a Gallup Poll. Twenty-five percent of polled adults expect to retire at the age of 65, whereas 39% think they’ll retire after the so-called magic age. According to some recent data, the average age is now 62.
According to research from the Pew Research Center, there is also a disparity between the age at which today’s workers say they plan to retire and the age at which today’s retirees actually did retire. The average worker expects to retire at age 61, according to the Pew survey, while the average retiree actually retired at 57.8. These numbers have crept upward since the mid-1990’s and in the decades before that, the age at which people expected to retire had been falling, as had the labor force participation rates of older men.
As for working in retirement, more than three quarters of today’s workers (77%) expect to work for pay even after they retire, according to the survey. Of those who feel this way, most say it’s because they’ll want to, not because they’ll have to.
But whatever the motivation, these expectations are dramatically out of step with the experiences of people who are already retired – just 12% of whom are currently working for pay (either part or full time). And only 27% had spent any time working in their retirement.
This data can have some serious implications on your retirement plan and your income plan in retirement. The message is clear: you may work less, earn less and have less income in retirement than you think. You also may end up retiring earlier than you think. All of which can impact your quality of life in retirement…in more ways than one.
Here’s some additional statistics to consider:
- Many consider the standard retirement age to be 65. One of the key influencers in arriving at that age was Germany, which initially set its retirement age at 70 then lowered it to age 65.1
- Every day between now and the end of the next decade, another 10,000 baby boomers are expected to turn 65. That’s roughly one person every 8 seconds.2
- The 65-and-older population is the fastest growing age group in the United States, and has grown by 34.2% over the past decade.3
- Ernest Ackerman was the first person to receive a Social Security benefit. In March 1937, the Cleveland streetcar motorman received a one-time, lump-sum payment of 17¢. Ackerman worked one day under Social Security. He earned $5 for the day and paid a nickel in payroll taxes. His lump-sum payout was equal to 3.5% of his wages.4
- Eighty percent of retirees say they are confident about having enough money to live comfortably throughout their retirement years.5
- The monthly median cost of an assisted living facility is over $4,000, and 7 out of 10 people will require extended care in their lifetime.2
- Financial planning experts feel that you should plan for Social Security to make up no more than 30-40% of your retirement income. Yet, sixty-two percent of retirees are dependent upon Social Security as the major source of their income. The average monthly Social Security benefit at the beginning of 2021 was $1,543.5,6
- Centenarians – in 2020 there were 92,000 of them. By 2060, this number is expected to increase to 589,000.7
These stats and trends point to one conclusion: The 65-and-older age group is expected to become larger and more influential in the future. Do you plan to retire before or after 65? Have you made an income plan? Have you projected how long your income sources will last once retired? Have you made arrangements for health care? Are you comfortable with your investment decisions? If you are unsure about your decisions, maybe it’s time to develop a solid strategy for the future.
When our parents retired, living to 75 amounted to a nice long life, and Social Security was often supplemented by a pension. The Social Security Administration (SSA) estimates that today’s average 65-year-old woman will live to age 86½. Given these projections, it appears that a retirement of 20 years or longer might be in your future.
How are you preparing for a long retirement? Are you prepared for a 20-year retirement? How about a 30-year or even 40-year retirement? Don’t laugh; it could happen. The SSA projects that about 33% of today’s 65-year-olds will live past 90, with nearly 14% living to be older than 95.2.
How hard is it to retire at 65 (or earlier)?
According to Go Banking Rates there’s lots of reasons that make it hard, some are obvious and some are often overlooked:
You Haven’t Saved Enough
Many people think that if they contribute to an IRA or a 401(k), they should have enough money to retire. Despite our best intentions, sometimes life gets in the way. You might think you’ve been fully funding your 401(k), but sometimes you only contributed enough to get the company match.
Maybe You Haven’t Saved Anything
The only good thing about not having anything saved for retirement is that you’re not alone. A GOBankingRates Retirement Savings Survey found that one-third of Americans have nothing saved for retirement — and 55% have less than $10,000.
You Don’t Want To Leave Money on the Table
You can start collecting Social Security at age 62, but you’ll get a smaller check each month. If you wait until your full retirement age, you’ll get your full benefit. Wait until age 70, and you’ll get even more — up to 8% per year more, depending on your year of birth.
You Don’t Know How Much You’ll Need
No one holds a crystal ball, so it’s difficult to predict how much money you’ll need to live comfortably in retirement. However, that doesn’t mean you shouldn’t try to estimate.
You Cashed In Your 401(k)
Your retirement savings will take a big hit if you take money out of an IRA, 401(k) or another qualified retirement plan before you reach age 59 ½. You’ll have to pay income taxes on the money, and you’ll probably pay a 10% penalty as well unless you used the money for certain qualifying expenses.
Your Spouse Has Passed Away
Postponing your retirement can become more appealing for a couple of reasons if your spouse happens to pass away before you retire. You might want the company of co-workers and the routine of going to work every day to help you with the loneliness that comes with being widowed.
In addition, you will only collect one Social Security benefit rather than the two you would have received had you still been married when you began receiving benefits. Granted, the benefit you receive will be the larger of yours or your spouse’s, but it will still be only one benefit.
You Didn’t Contribute To an IRA When You Could
You can contribute to an IRA or Roth IRA even if you have a retirement plan at work. You might not be able to deduct your contribution on your income taxes, so you would be contributing after-tax dollars. You can still get the benefit of savings that grow tax-deferred, however.
You Think You’ll Spend Much Less in Retirement
Certain expenses are associated with working that will stop once you retire, such as commuting expenses, a work wardrobe and lunches out. But you’ll also have lots of free time, and that can be a temptation to spend. Make a retirement budget so that you’ll know what you need to have saved, and then stick to it once you’ve retired.
You’re Relying Exclusively on Social Security
Social Security is designed to replace only about 40% of your pre-retirement income. Even if you delay receiving your benefits until age 70, you won’t come close to the money you were making during the time period when you were working. To continue the lifestyle you have, you’ll need additional income.
You Want To Have a More Lavish Retirement
You might want to keep working if you want to spend more money in retirement your savings, projected income from Social Security and other sources might allow. For example, if your retirement plans include expensive travel, a second home or costly hobbies, you’ll need the extra funds.
You Want To Keep Working
Retiring after 65 isn’t always a necessity. Some people choose to continue working, either at the same job or a different one. They might cut back to a few days a week or choose to work fewer hours a day, but they want to keep working. A recent Gallup Poll found that 74% of Americans plan to work past retirement age.
65 Is No Longer Considered the Full Retirement Age
As we live longer, our retirements are becoming longer, which means people collect Social Security for longer. The Social Security Administration is adjusting the so-called full retirement age so that anyone born after 1937 will have to wait until after age 65 to collect their full retirement benefit. And if you were born in 1960 or later, your full retirement age is 67.
You Don’t Want To Leave Money on the Table
You can start collecting Social Security at age 62, but you’ll get a smaller check each month. If you wait until your full retirement age, you’ll get your full benefit. Wait until age 70, and you’ll get even more — up to 8% per year more, depending on your year of birth.
You Don’t Know How Much You’ll Need
No one holds a crystal ball, so it’s difficult to predict how much money you’ll need to live comfortably in retirement. However, that doesn’t mean you shouldn’t try to estimate. By discussing your situation with a qualified financial advisor, you can get a much better handle on how much you’ll need to retire.
You Claimed Social Security Early
You can claim Social Security retirement benefits as early as age 62, and many people will claim as early as they can. But if you claim at age 62, you’ll receive a benefit that’s 30% less than what it would be at your full retirement age, assuming you were born after 1959.
It’s more beneficial if you can delay until age 70. The amount you get when you first claim is the amount you’ll continue to get — plus cost of living adjustments. Bottom line: If you claim early, you’ll get a smaller check for the rest of your life.
You Cashed In Your 401(k)
Your retirement savings will take a big hit if you take money out of an IRA, 401(k) or another qualified retirement plan before you reach age 59 ½. You’ll have to pay income taxes on the money, and you’ll probably pay a 10% penalty as well unless you used the money for certain qualifying expenses.
You’ll also have to contribute more to make up for the taxes and penalties, making it that much more difficult to reach your goals. Make it a point not to touch your retirement savings until retirement.
Your Spouse Has Passed Away
Postponing your retirement can become more appealing for a couple of reasons if your spouse happens to pass away before you retire. You might want the company of co-workers and the routine of going to work every day to help you with the loneliness that comes with being widowed.
In addition, you will only collect one Social Security benefit rather than the two you would have received had you still been married when you began receiving benefits. Granted, the benefit you receive will be the larger of yours or your spouse’s, but it will still be only one benefit.
You Didn’t Contribute To an IRA When You Could
You can contribute to an IRA or Roth IRA even if you have a retirement plan at work. You might not be able to deduct your contribution on your income taxes, so you would be contributing after-tax dollars. You can still get the benefit of savings that grow tax-deferred, however.
Your Mortgage Isn’t Paid Off Yet
Low-interest rates have made it attractive for a lot of people to refinance their homes. But for those in their 50s or 60s, refinancing to a 30-year mortgage means potentially making mortgage payments into their 90s. A 15-year mortgage might be a better choice, but if you have a 30-year, try making double payments to get it paid off quicker. Entering retirement with little or no debt will help your savings go farther.
You Have Too Much Other Debt
Just like interest compounds to make you richer, debt compounds to make you poorer. And debt has been on the rise for people in the retiree age group. In fact, debt held by 50- to 80-year-olds increased 60% between a twelve year period, according to the Center for Microeconomic Data. Consider beginning to reduce your debt now because being debt-free in retirement could help your savings go a lot farther.
You’re Still Paying Off College
Even if you did the right thing by not robbing your retirement account to pay for the children’ college, you might have had to take out loans. These loans can have terms of 15 or 20 years, so you might still be making payments if your children cannot. It’s a good idea to get those student loans paid off before you stop working.
Your Children Still Need You
Some people postpone retirement because their children still need them. Having children later in life means they might not have finished college by the time you are 65 and might need your support. Or, they might be just starting families, and you want to be in a position to help them financially, which requires that you continue to work.
Your Parents Need You
In a development that was nearly unheard of a generation ago, some people who are approaching retirement are still caring for aging parents. Although a 65-year-old might not be actually providing the care for an 85-year-old parent, they might be paying for it, which would prohibit them from retiring at 65.
You’re Afraid You Won’t Have Enough To Live On
You’re not alone if you wonder how far the money you’ll have saved at retirement will take you. There are a lot of variables, but sitting down with a financial professional will help you make sense of your situation and let you come up with some strategies to get from where you are to where you want to be.
You Fell Victim to ‘Sequence of Returns Risk’
You might have done a good job saving for retirement and feel you have enough put aside to live comfortably. Then you run up against the dreaded ‘sequence of returns.’
You might plan to withdraw $40,000 per year for the rest of your life if you retire with $1 million. But if the market drops 50%, now it’s as though you were taking out twice as much money each year. In addition, you’ll need a 100% return to get back to where you were.
You Didn’t Account for Taxes
When you withdraw from your IRA or 401(k), that money is treated as taxable income. You didn’t pay taxes on it when you invested it, so you have to pay them now. Most people think they will be in a lower tax bracket in retirement, but that might not be true. Be sure to account for taxes when you’re calculating how much to withdraw from your IRA.
You Assumed You Wouldn’t Be Taxed on Social Security
You might have to pay taxes on up to 50% of your Social Security if you are single with an income between $25,000 and $34,000 or married with a combined income between $32,000 and $44,000. The amount you’ll pay varies based on your income and filing status, but you will never pay taxes on more than 85% of your benefit.
You Didn’t Master the Market
Some people simply have the bad luck to reach age 65 just at the moment the market takes a nosedive. Unless they have saved considerably more than they need, they might need to postpone retirement so they can save more and wait for market conditions to improve. Careful planning can keep the negative effects of a downturn to a minimum, but in a serious market reversal, you might need to work a few more years.
You Love Your Job
Some people don’t retire at 65 because they don’t want to. Keep working as long as you want if you love your job.
Once you reach your full retirement age — 67 for those born in 1960 or later — you can collect Social Security and still work. But if you collect before full retirement age, your benefit might be reduced if you work. It might make sense to wait until age 70 to collect your Social Security retirement benefit and get a bigger check every month.
You Have a Dream
Sixty-five is the new 45, and many people feel they still have a lot more living to do. Even if you retire from your lifelong career at 65, you could start a new venture. Perhaps you’ve always wanted to start your own business. Or you might want to teach, imparting the wisdom you’ve gained from your years of working.
You Make Money From Your Hobbies
You might find a new way to keep your mind sharp, interact with other people, and earn a little money — maybe even something related to a hobby you enjoy. For example, if you’re a golfer, you might enjoy teaching lessons or being a caddy. You could also teach cooking or art appreciation lessons if those things appeal to you. Think about what makes you happy, and then find a way to make it a second career.
You Don’t Want To Be Bored for 30 Years
Sixty-five became the retirement benchmark in the United States in 1935 when the Social Security Act was enacted. Since the program first began paying monthly Social Security benefits in 1940, the average life expectancy for men reaching age 65 was 77.7 years old and 79.7 years old for women.
So how do we decide when we’ll retire and how do we gain confidence in our decision?
Start with good questions.
How can you draw retirement income from what you’ve saved? How might you create other income streams to complement Social Security? And what are some ways you can protect your retirement savings and other financial assets?
Enlist a financial professional.
The right person can give you some good ideas, especially one who understands the challenges women face in saving for retirement. These may include income inequality or time out of the workforce due to childcare or eldercare. It could also mean helping you maintain financial equilibrium in the wake of divorce or death of a spouse.
Invest strategically.
If you are in your fifties, you have less time to make back any big investment losses than you once did. So, protecting what you have may be a priority. At the same time, the possibility of a retirement lasting up to 30 or 40 years will require a good understanding of your risk tolerance and overall goals.
Consider extended care coverage.
Women have longer average life expectancies than men and may require significant periods of eldercare. Medicare is no substitute for extended care insurance; it only covers a few weeks of nursing home care, and that may only apply under special circumstances. Extended care coverage can provide financial relief if the need arises.1,3
Claim Social Security benefits carefully.
If your career and health permit, delaying Social Security can be a wise move. If you wait until full retirement age to claim your benefits, you could receive larger Social Security payments as a result. For every year you wait to claim Social Security, your monthly payments get about 8% larger.4
Retire with a strategy.
As you face retirement, a financial professional who understands your unique goals can help you design an approach that can serve you well for years to come.
Always have a plan B in case plan A doesn’t work out.
As always, please reach out to me at any time at Lynnt@herretirement.com.
I’m here to help you know more and have more, and help you Get Her Done.
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Sources:
- Go Banking Rates, February, 2022
- gov, January 2020
- gov, February 25, 2020
- gov, February 25, 2020
- Investopedia, November 24, 2019
- Social Security Administration, 2021
- com, 2021
- The United States Census Bureau, 2020
- Social Security Administration, 2021
- Employee Benefit Research Institute, 2021
- org, December 23, 2020
- com, January 10, 2021
- S. Bureau of Labor Statistics, 2020
- American Work Life Is Worsening, But Most Workers Still Content. August 30, 2006. Pew Research Center
- Here is the age when many Americans hope to retire (cnbc.com)