October 25, 2013
Have you heard that 70 is the new 65?
If not, you will. Momentum is growing to get people to think that way before retiring. The notion is being trumpeted in the nation's capital as a way to ease pressure on Social Security, and it is circulating among financial planners. The idea is to get people to work longer and delay retirement so they end up with more money for monthly retirement living expenses.
With the notion strong in public policy circles, the Center for Retirement Research at Boston College recently analyzed the implications. Its initial conclusion is that people need to start thinking of 70 as the new retirement age.
If 70 becomes the age when people can start collecting full Social Security benefits, those who naively retire earlier could end up struggling with far less monthly income than they will need.
"Cuts in benefits, by extending the full retirement age, will lead to very low benefits for early retirees," said Alicia Munnell, director of the Center for Retirement Research.
Of course, at this point the change is not imminent. There are multiple proposals in Washington for dealing with the time when Social Security is no longer able to pay people what they are expecting. And the political pressure to insulate the system from change is tremendous.
But people need to be thinking ahead so that if they plan to retire earlier than 70, they will have enough savings to fill in where Social Security leaves off. Even now, financial planners are urging people to work to 70, so they end up with more spending money than if they retire at the full retirement age of 66, or even earlier at 62. At 62, people can get small Social Security benefits, but each year they wait increases their monthly check about 8 percent.
According to Munnell's research, retiring at 62, rather than 70, cuts the monthly benefit almost in half. A person who would receive a monthly Social Security check of $1,000 upon retiring at 70 would get $568 at 62.
That's been a huge selling point for waiting to retire. In addition, financial planners have emphasized that while investments in 401(k) plans and IRAs can lose money during a bad period in the stock or bond markets, Social Security remains a sure thing — a benefit that consequently must be embraced fully. Not only does it provide a guaranteed payment each month for as long as you live, but it also increases as inflation occurs. So, if you retire now and figure you can live on $3,000 a month, inflation of 3 percent a year will mean you will need about $6,300 for the same lifestyle 25 years from now.
Before retiring, it's wise to try an inflation calculator online for a view of your future needs. Many people retire without considering how much they will need or the sources of their income. Besides Social Security, people need savings from individual retirement accounts, 401(k) plans or other sources.
Munnell says a retirement age of 70 makes sense because people are living longer, and are healthier, than when the retirement age was 65. Since 1940, she said, life expectancy has increased seven years for both men and women. In 2015, the average woman who is 65 can expect to live another 21.6 years. In 1940, it was only 14.7 years. The average man of 65 in 2015 is expected to live 19.3 years — significantly longer than the 12.7 years for a man in 1940.
The increase in life expectancy "suggests that people may have outgrown the physical need for retirement at 65," said Munnell. On the other hand, she cautions policymakers that the ability to keep working is not uniform, so a hard-and-fast retirement age of 70 could be painful for people who are not healthy.
Social Security is used by lower-income people as the major source of retirement income, and she cautions government about raising the retirement age to 70 in an attempt to reduce the level of monthly benefits it would pay to someone retiring at the full age.
Currently, she notes, Social Security will replace about 50 percent of the monthly income a medium-earner would have earned on his or her last job before retiring. But she notes Medicare premiums are deducted from Social Security benefits, and retired individuals with income over $25,000 pay taxes on Social Security.
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