Age 65 has long been the go-to target date for retiring. But it is in need of a 21st century update. Increased longevity makes a case that age 70 is the equivalent of the 65 of our grandparents.
The age 65 retirement norm is a product of Social Security. When the program was first launched in the 1930s, 65 was the age when participants were eligible for full retirement benefits. Reform in the early 1980s raised Social Security’s full retirement age. Anyone born in 1960 or later now must wait until age 67 to receive 100% of earned benefits. Yet it is still common for retirement-planning tools to default to age 65 as the norm. Old habits die hard.
Yet even 67 looks a bit young as a target retirement date. In a research paper for the Brookings Institution, academics from the Center for Retirement Research at Boston College explained that, if the goal is to maintain the same ratio of work years to retirement years as was the norm in the 1940s, the correct national retirement age should be 69 years and nine months, rounded up to 70.
That should dispel any notion that working a bit longer than one’s parents or grandparents is somehow unfair. In reality, stopping work in your 60s is the potentially unfair move, as it puts more pressure on you to live off retirement income for a very long period.
The challenge is to set yourself up to be able to have the right type of work in your 60s. There’s a good chance it may not be where you are working in your 50s. The Urban Institute tracked government employment data for workers from age 50 to 65 and found that half suffered at least one involuntary job loss, and among people who are laid off, 90% never made as much when they found another job.
Here’s how to build a retirement plan that will enable you to navigate your 60s, so you can land in full-blown retirement in your 70s in solid financial shape.
• Make a work downshift a feature, not a bug of your retirement plan. Take a look around your office. How many 66-, 67- or 68-year-olds are there? Not many, right? The Transamerica Center for Retirement Studies suggests there is a disconnect at work. In a recent survey, three in four employers insisted that they are “aging friendly,” yet barely half of employees felt the same. Your goal should be that you can afford to take a less intense job at a lower salary in your 60s. And that requires making some smart choices right now. Keep reading.
• Save more. Now. If your retirement strategy is to need to keep saving in your 401(k) and IRA all the way until age 70, you are putting pressure on yourself to keep earning enough to be able to do that. To avoid that pickle, the goal should be to save as much as possible right now. In 2020, anyone at least 50 years old can save as much as $26,000 in a 401(k) or 403(b) and up to $7,000 in an IRA. By saving more now, you also give that money more time to benefit from compound growth.
If you can front-load more savings into your 50s, you give yourself breathing room to save less (or not need to save any more) in your 60s. That can be a huge help if you decide you want to downshift to a less demanding job, or you get pushed out of your career job. In either of those scenarios, all you would need to do is find work in your 60s that can pay your current bills and allows you to leave your retirement savings marinating for a few more years before you start making any withdrawals.
• Spend less. Now. Let’s start in the garage or driveway. Any car payments? Your goal should be to get those paid off ASAP and then keep driving the car for many more years payment-free. Those are years where you can redirect the car payment into your retirement account. The average car payment is more than $520 a month. Save that much for five years, earning a 5% annualized return, and you will have more than $35,000 saved. If that $35,000 stays invested for another 15 years, it will be worth more than $58,000, assuming the same 5% annualized gain.
Got kids prepping for college? Frame the hunt as a search for a family dream school. The best school is one where your kid will emerge with a manageable amount in student loans, and you will not need to take out PLUS loans. Without the extra cost of PLUS loan repayments, you won’t feel so much pressure to keep earning a higher salary through your 60s.
If you plan to stay put in your home, another way to land in your 60s with more financial flexibility is to have the mortgage paid off in your early 60s. Without that big-ticket claim on your cash flow, you will be fine if you are earning less. Or if your plan is to downsize to cut costs, perhaps you move that up in your retirement planning timeline, if practical.
If you land in your 60s without the pressure to hold on to your high-salary job, you shift the dynamics in your favor. If you don’t need to keep saving more for retirement and the mortgage and other debts are paid off, you can set your sights on less intense work, perhaps with a flexible schedule. That’s going to go a long way to making working until age 70 more appealing.