The conventional wisdom has long held that retiring at 65 is the golden age of retirement, a time when one can finally relax and enjoy the fruits of a lifetime of hard work. However, as we delve deeper into the numbers and the science, it becomes clear that this is far from the case. Retiring at 62, for instance, can cost the average American a staggering $250,000 in lifetime income, and it's not just about the money. It's about the impact on our health and cognitive abilities, too.
One of the key issues is longevity risk. We're living longer than ever before, and this has significant implications for retirement planning. A 65-year-old American man can now expect to live another 18 years, and a woman another 21. This means that the conventional retirement age of 65 is no longer sustainable. It's time to rethink what retirement is and what it should look like.
The first multiplier is the impact of claiming Social Security at 62. This locks in a permanently lower benefit, reducing lifetime income by around 30%. Waiting until 70 increases the benefit by about 77%, making it the single highest-return financial decision available to most Americans. However, many retirees don't get to make this decision twice, and the consequences can be severe.
The second multiplier is the impact of early retirement on the most fragile financial phase of retirement. Retiring at 62 means beginning to withdraw from savings during a market downturn, locking in losses that can permanently damage retirement security. This is known as sequence-of-returns risk, and it's a significant concern for early retirees.
The third multiplier is the impact of early retirement on cognitive decline. Research from the National Bureau of Economic Research has found that leaving the workforce leads to measurable cognitive decline, while staying in leads to greater sustained cognition. This is particularly relevant for Gen X workers, who are facing the consequences of early retirement on their mental health.
So, what's the solution? The answer is not to work until 80, as this can lead to burnout and ageism. Instead, we need to re-architect retirement for a 30-year second act, rather than a five-year one. This means staying engaged in work that gives the brain a reason to show up, whether paid or unpaid.
It also means building a guaranteed income floor that can last into the eighties and nineties. This means planning for 95 and stress-testing to 100. The decision of when to claim Social Security should be treated as a longevity bet, made once, with no second click. The retirement we understand is built for shorter lives, but the one we will live must be built for longer ones.
In my opinion, the conventional wisdom of retiring at 65 is outdated and dangerous. We need to rethink retirement for a new era, one that takes into account the realities of longevity risk, cognitive decline, and the need for a guaranteed income floor. Only then can we truly enjoy the benefits of a longer, healthier retirement.
