When it comes to retirement, later may be better.
Americans long viewed 65 as the age to stop working. It was considered full retirement age by Social Security for many, Medicare benefits kick in then and historical practice had established it as the goal.
Now some experts are suggesting people set their sights a bit higher — on 70.
The reason? Working a few more years or drawing your Social Security benefits later can significantly boost income. That’s particularly important as fewer workers receive pensions. Americans largely have taken on the responsibility for saving for their retirement — often failing to do so adequately.
“We keep adding years of life and it all got tacked on to the retirement period and it never changed the retirement age,” said Steve Vernon, a research scholar at the Stanford Center on Longevity in its financial security division.
As such, Mr. Vernon and his colleagues analyzed nearly 300 different retirement income methods and found that the best approach for middle-income retirees to have a reliable source of income through retirement is to wait until age 70 to claim Social Security, which is when benefits peak. They should also use the required minimum distribution calculation to determine how much to draw from personal savings, such as a 401(k) or IRA.
The RMD is the minimum amount that the IRS says you must draw from retirement accounts each year once you reach age 70½.
This approach, dubbed the “Spend Safely in Retirement Strategy,” in effect “pensionizes” common retirement accounts like a 401(k) or IRA. It will not compensate for inadequate savings but it will help squeeze as much income as possible from existing sources.
To make it work, some retirees may have to significantly lower their living expenses.
Mr. Vernon said it’s a straightforward way for middle-income workers with between $100,000 and $1 million in savings to generate a stream of lifetime income. He estimates this group represents as many as half of all workers age 55 and older. And workers need some help as most will not consult a financial planner and few calculate how much they’ll need.
“You can’t just tumble into retirement, you have to be thoughtful about it,” he said.
Americans typically retire at age 63 and start collecting Social Security between age 62 to 64, according to research from The New School.
But waiting pays off.
Stanford researchers estimate that Social Security benefits represent up to two-thirds of a middle-income retiree’s retirement income if they start drawing them at age 65. If they wait until 70, it represents up to 85 percent, according to the Stanford research.
While working that long sounds onerous to some, it doesn’t have to be at full tilt.
Some workers will need to work “just enough” — either in their existing field or another — to pay for living expenses until age 70 in order to put off claiming Social Security benefits. It works best if a retiree waits until age 70 as that is when benefits peak, but still has advantages for those who retire in their late 60s.
“In essence, 70 is the new 65,” Mr. Vernon’s report says.
Popular personal finance celebrity expert Suze Orman recently wrote that people should wait until 70 to retire, not “one month sooner.” Other experts say a later retirement is a good idea for some workers, when it makes sense for their situation.
“Anyone who is a little behind in their savings, even just one year of delay can make a big difference,” said Dan Keady, chief financial planning strategist at TIAA. “I hate to put a number to it, but the concept of working a little bit longer is an important one.”
The original idea of retirement was a few years of dignity before you died when you were unable to work, according to Mr. Vernon. The concept of retirement as your golden years didn’t take hold until the last half of the 20th century.
When America began introducing private pensions and federal programs, many used 65 as the retirement age. So when Social Security came along in 1935, they looked at common practices and decided 65 seemed reasonable as well.
The problem is, it stuck.
Meanwhile, people began living longer, pensions became less common and Americans had to manage their own retirement savings with more years to pay for.
As a result, some Americans are trying to work longer.
The workforce participation rate, which is a measure of those working or looking for work, for age 65 and older was 10.8 percent in 1985. The rate has increased incrementally almost every year since then and as of this March it was 19.5 percent.
And a recent Willis Towers Watson survey of nearly 5,000 employees found that 37 percent of employees expect to work past age 70, up from 30 percent two years ago.
“Financial pressures are driving many employees to retire later,” said Pat Rotello, senior consultant at Willis Towers Watson. “Employees with money worries are more likely to keep working past normal retirement age to help sustain their income.”
However, these tactics are often easier said than done.
Workers often retire earlier than planned because of health problems, layoffs or caregiving demands, said Theresa Ghilarducci, professor of economics at The New School. Older employees are also forced out, experts say.
Those who want to work into their later years sometimes have difficulty finding work. AARP senior vice president of programs Jean Setzfand said that age discrimination becomes a very real thing as early as 45.
And, Ms. Ghilarducci notes, these draw-down strategies only work for those that have something saved, while many have nothing.
“The sense that 70 is the new 65 isn’t true for a vast majority of workers, it isn’t even an option,” she said.