Age 62 has its perks. Coffee at McDonald's is cheaper. Movie theaters often offer discounts for seniors. (Recently, the ticket guy at a local theater informed me about their baby boomer special for those 55 or older; I'm 46.) And, perhaps most important of all, you can start collecting Social Security benefits.
However, I'd argue that 70 or older is the ideal retirement age, not 62 or 65. Here are three reasons why:
1. Social Security benefits. While it's true that you can begin collecting benefits at 62, it's often not a smart move. Full retirement age is 65 to 67, depending on when you were born, which is when retirees qualify for unreduced benefits. If you start collecting before your full retirement age you'll receive less money.
If you wait until age 70 to begin collecting benefits, you'll receive a larger check each month for the rest of your life. But few people wait that long to begin payments. According to an analysis by UCLA and Duke University researchers, 50 percent of Americans start collecting Social Security at 62 or within two months of leaving the labor force, and about 80 percent claim benefits before their full retirement age.
2. Life expectancy. Life expectancies have increased over the last century. That's good news for us, and bad news for our retirement portfolio. Perhaps the biggest retirement planning obstacle is making sure we don't outlive our nest egg. As we live longer, yet still retire at 65, we put more and more pressure on our sources of retirement income. Add to that the reduction in benefits for collecting Social Security early, and it's a recipe for a beans and rice retirement.
Delaying retirement by even five years has distinct advantages. The years just before retirement are often when we make the most money. That income can help you save more for retirement or pay down any existing debt. Second, a five-year delay gives our investments more time to grow before we begin withdrawing money. Our retirement accounts will also have a smaller load to bear because we've shaved five years off of our retirement.
3. Debt. A recent poll by Securian Financial Group found that 67 percent of those surveyed expect to carry mortgage debt into retirement. Add to that the consumer debt that many baby boomers and retirees have, and the retirement picture begins to look bleak. It's difficult enough to make payments on debt during our working years. To add that burden to retirement income sources is more than many people can reasonably bear.
Working an extra five years allows you to pay off more debt. While it may not allow you to retire all of your debt, it could reduce the required payments during retirement. Indeed, a recent Urban Institute study found that debt is precisely why many people defer retirement.
The researchers also found that debt is increasing among older Americans. From 1998 to 2010, the percentage of adults ages 62 to 69 with debt increased from 47.9 to 62.3. The average amount of debt also increased, from $19,020 to $32,130. As a result, many older Americans are claiming Social Security benefits earlier and working longer.
While these results are not surprising, they underscore the dynamics between debt and our retirement choices. Working an extra few years just may help us make more sound financial decisions.
Rob Berger is the founder of the popular personal finance blog, the Dough Roller. He is also the editor of the Dough Roller Newsletter, a free weekly newsletter with tips and resources to help readers improve their finances.
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