For almost a century, 65 has been seen as the age at which people retire in America. This is largely due to the original Social Security Act of 1935, which set the minimum age for full retirement benefits at 65, and since then, 65 has seemed like the magic number for retirement.
Does that age still make sense, though? In 1935, the average life expectancy for an American male was 59.9 years; women, 63.9 years. Today, the average American’s life expectancy is 78.7 years. Yes, today, the average American lives 15 to 20 years longer than when the retirement age was originally set in 1935.
The biggest reason why life expectancy has gone up is improved medical care. People have access to medicines, treatments and more nutritious food, enabling them to not only live far longer than they used to but enjoy a healthy and productive life for much longer.
This brings options. Some people can’t wait to retire from having to trade their energy and time for basic needs and thus want to retire as early as possible. Others find great value in their jobs and enjoy more expensive luxuries, so they may want to wait until later.
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What about from a financial sense, though? Does a retirement age of 65 still make financial sense if people are living for so much longer? Let’s look at each scenario — retiring before 65, retiring at or close to 65 or retiring later than 65 — and see whether the finances make sense.
Retiring early before age 65
Retiring before age 65 has become quite popular lately, with a movement called FIRE (financial independence / retire early) dedicated to this approach. Sounds impossible? It isn’t, but it requires dedication.
Retiring before age 65 — particularly well before 65 — requires several significant lifestyle choices that persist throughout much of your adult life. The biggest is an ongoing commitment to spend only a fraction of what you earn and putting aside the rest for early retirement.
Is retiring early a good idea?
The challenge of retiring before 65 is that saving up enough for retirement before Social Security kicks in to help can be difficult. FIRE centers around living below your means and seeking out low cost personally meaningful activity to center your life around. Pleasure is found through frugal hedonism, which simply means filtering pleasurable activities through the filter of cost and applying a little creative muscle.
One important thing to remember is that you can begin to make withdrawals from your retirement accounts before typical retirement age. With a Roth IRA, you can withdraw your contributions (but not your gains) without penalty before age 59 1/2. There are also strategies for 401(k) and 403(b) accounts that allow you to withdraw before typical retirement age in some situations. Consult a tax professional before making any decisions regarding early withdrawals from your retirement accounts.
Retiring on-time at age 65
Social Security benefits begin to kick in at age 62. After that, the longer you wait to start taking Social Security benefits, the larger your benefits will be until you hit your maximum retirement age, which is 67 for people born after 1960.
Most smart retirement planning strategies center around maximizing the value of your retirement accounts at this age by using aggressive investments earlier in life, then moving them partially and gradually into more stable investments as you approach retirement age and actually retire.
Is retiring at 65 a good idea?
Yes! A very healthy retirement is available for people who retire at age 65 (or retiring at age 67 if you want to hold out for full Social Security benefits) provided they make small but steady contributions to a retirement account all the way through their professional lives or do so with strong intensity for a period of their life. A leaner retirement is possible at this age if you start saving consistently for retirement by your mid-30s or start saving with intensity a little later.
Knowing exactly how much you need to save depends heavily on what age you are when you make the decision to start saving for retirement.
Retiring late after age 65
Some people simply aren’t interested in retirement at age 65. Maybe they’re passionate about their jobs and want to do it for as long as they can. For others, the thought of retirement seems miserable, as they gain purpose from their work even if they don’t love it. For still others, it may just not make financial sense to retire at age 65.
For people in this situation, retirement savings are less important. It’s still valuable to put aside money for retirement, particularly early on so that compound interest helps grow that money quickly, but contributing a small percentage of your salary all the way along will be sufficient. Even if you didn’t start until very late, if you’re willing to delay retirement for a while, you can still have a comfortable retirement if you save aggressively.
Is retiring late a good idea?
It depends on your goals and your retirement savings situation. Retiring late is great if you love what you do and are in good health, and waiting on retirement can also be a smart move if you don’t think you can make it on Social Security alone and need to put money aside.
How do I know I’m financially ready for retirement?
Your first step is to get a quick estimate of what Social Security will provide you, and at what age. You can find this out by using the Social Security Administration’s Social Security quick calculator, which will easily estimate your monthly benefits at different retirement ages.
What if your retirement number seems impossibly big? You may be overlooking a few key factors in your favor, such as the possibility of matched retirement funds from your employer or the fact that your spending will decline when you retire (no more commuting!).
Here’s a checklist for figuring out if you’re financially ready for retirement:
- Do you have enough for retirement? This AARP Retirement Calculator will help you work through the numbers and see what you need to retire in the way you want.
- Do you have a monthly budget for how you’ll spend your retirement savings? Be sure to factor in medical costs, regular expenses and home maintenance repairs.
- Are your debts (mostly) paid off? While you might still have your mortgage payments to consider, any other debts — like student loan or car payments — should be cleared and squared away.
- Can you access your retirement savings? If you’re younger than 59 1/2, remember that withdrawals on certain retirement accounts will incur a penalty, which is something you want to avoid.