Below is an excerpt from the book Downsize Sooner than Later – 18 Rules for Retirement Success available on Amazon.com.
On a bedrock level, retirement begins for anyone the day he or she becomes physically incapable of performing economically productive work. While this represents the far end of the retirement spectrum, it is important to pay attention to this fact. When the time eventually comes that you can no longer work – even if you want to – you must be ready.
Beyond a strict involuntary retirement, as alluded to above, there are several other potential retirement modes:
- Voluntary Full Retirement: retired with full productive capacity intact.
- Voluntary Partial Retirement: retired with full productive capacity intact, but only partially deployed (i.e. part-time work).
- Involuntary Partial Retirement: retired with involuntarily reduced productive capacity (i.e. willing to work full-time but diminished physical ability to do so).
- Involuntary Full Retirement: productive capacity fully depleted.
One conclusion to draw from this array is that – at least initially – the idea of retirement need not be a complete “on and off” switch. Depending on one’s circumstances, it may be favorable to transition into a partial mode of retirement and remain economically productive. Such a path can offer continued income, while simultaneously providing more time for enjoyable pursuits such as hobbies, travel, and time with grandchildren.
Partial retirement also opens the door to the continued growth of nest egg savings, reduced spending pressure on nest egg assets, increased social connections, and an overall boost in retirement security. We will be revisiting several of these benefits in later rules.
When Should You Retire?
Many people ask about the optimal time to begin retirement. The first part of answering this question is to understand the retirement system in which you are working. For some, the answer may be simply, “Retire on the date in which it no longer benefits you to continue working.” This can occur in certain retirement systems where benefits reach a maximum such that continuing work adds little additional value.
A friend of mine works in a system where, after a certain point, salaries and benefits essentially cap. As a result, he would make roughly as much choosing to retire as he would by continuing to work in his current job. It also happens that his occupation extracts a significant physical toll on his body. For him, retiring soon and switching to a “voluntary partial” work level in a less physically demanding industry may make sense.
Frequently, I recommend that people with above average health consider putting off the decision to begin Social Security benefits until age 70. Despite the political tumult kicked up in the media about the long-term prospects of Social Security, it remains a high-quality source of pooled income for retirees. Funded by beneficiaries, it pays benefits for the lifetime of the recipient, includes survivor benefits, and offers provisions to protect against inflation.
Sometimes, people have a hard time accepting age 70 as a potential retirement age. This stems in part from long-held conventional wisdom pointing to age 65 as the customary and expected time for retirement. Retiring later than 65 is viewed by many as somehow a disappointment, a loss, or a reflection of failure.
As we have already noted, be careful of conventional wisdom. In a simple and rather revealing thought experiment, take a moment to think of any older billionaire you can name. Nearly all are still working at least partially in endeavors they enjoy, regardless of their age and overall level of financial success.
What’s so special about age 65?
Have you ever wondered where the convention to retire at age 65 came from? How was this age chosen over others? How long has age 65 been popularly viewed as an optimal standard for retirement?
The original mass-market appeal for a standard retirement age dates back to the late 1800s.
- The “Iron Chancellor” of Germany, Otto von Bismarck, is credited with advancing the idea of a social security system to offer benefits to the working class.
- The target age for benefits adopted in the original German plan established in 1889 was age 70.
- In 1916, 27 years later, the age was lowered to 65.
The Social Security Act was signed into law in the United States in August 1935. The decision to adopt age 65 as the target for benefits occurred through a combination of actuarial studies and surveys of the average ages used by existing retirement systems. At the time, “…roughly half of the 30 state pension systems used age 65 as the retirement age and half used age 70.”*
*Source: https://www.ssa.gov/history/age65.html
Since the early 1900s, a lot has changed.
Particularly revealing is to examine life expectancy at the time various target retirement ages were adopted. Statistics about life expectancy can be difficult to align with precision because they vary due to demographic factors such as gender, ethnicity, and country of origin. Here, however, are at least are a few ballpark approximations:
- In 1891–1900, when the German plan began with a retirement age of 70, life expectancy from birth in Germany was roughly age 40.58 for a man and age 43.98 for a woman. (1)
- In 1935, the Social Security Act specified a retirement age of 65. At the time, life expectancy from birth in the United States for a man was roughly age 59.42 and age 63.32 for a woman. (2)
- In the United States, the “full benefit” retirement age for those born in 1955 is 66 years and 2 months. Life expectancy from birth in the U.S. today is roughly age 76.1 for a man and age 81.1 for a woman. (3)
Source (1): https://www.lifetable.de/cgi-bin/index.php
Source (2): https://www.cdc.gov/nchs/products/databriefs/db328.htm
Source (3): https://www.cdc.gov/nchs/data/nvsr/nvsr67/nvsr67_07-508.pdf
In the past, social insurance plans did not begin benefits until well after the average life expectancy from birth.
Today they begin benefits well before the average life expectancy from birth.
Additionally, it is important to observe that life expectancy tends to increase based on higher attained age. This means the older you get, the longer you tend to live. This is so because as you age, you begin to bypass risks impacting mortality that are included in the “life expectancy from birth” averages. For example, when you are older, though you still face mortality risks related to your current age, you no longer face risk of death related to childhood diseases, uniquely youthful accidents, or death related to childbearing, which are included in the life expectancy from birth averages.
For persons reaching age 65 in the United States today, life expectancy now approaches age 83 for men and age 85.5 for women. These numbers are roughly 5–7 years longer than the average life expectancy from birth and 16–18 years longer than full-benefit starting dates for Social Security.
But it doesn’t end there.
Remember that these numbers are only averages – half will live even longer.
So, what does all this tell us?
First, when to retire is an individual choice and many factors are involved, including your health, finances, and your personal perspective. Don’t let conventional wisdom make you feel bad about choosing the retirement date that makes the most sense for you.
Second, retiring at age 65 is not a hard-and-fast rule. You can choose to follow this norm or walk right past it. Sometimes, you just need someone to tell you it’s OK to do so. For what it’s worth, I am happy to serve in that capacity.
For my part, I plan to delay Social Security benefits for as long as possible and to stay economically productive for as long as I can – more on that in the next rule.
For those who qualify, putting off Social Security benefits to age 70 can serve to significantly increase monthly lifetime income and overall financial security.
- Delaying taking Social Security benefits – even by just a year or two – will increase your monthly benefits for the rest of your life.
- Once the full benefit age transitions to age 67, a person can increase his or her benefits 24% as a result of delaying just three additional years (i.e. to age 70).
- If you are the higher income earner in a couple, you have two lives for which to plan. Delaying benefits can mean increased survivor benefits for your spouse if he or she ends up outliving you.
- In 2018, the maximum benefit for those delaying Social Security to age 70 was $3,698/month.
To learn more about what delaying Social Security benefits might mean for you and to access a retirement benefit estimator based on your actual earnings, visit the United States Social Security Administration website at: https://www.ssa.gov
Questions or comments?
I can be reached at this link – contact Ted Stevenot.