Why Retire at 65?

Charles D. Ellis

ONE OF THE VERY best financial decisions is available to almost every American worker. That’s the good news. The bad news: Most workers won’t take advantage of this opportunity. Worse yet, they don’t know about it, and no one is telling them—even though they may need to make the right decision to be financially comfortable in their elder years.

What’s that best financial decision? I’ll get there in a moment.

Health care has been making wonderful progress in the past few decades. As doctors like to put it, “The average American at 70 today is as healthy as the average American at 50 in 1950.” Unfortunately, there’s a dark side to this splendid achievement. Old age is getting increasingly costly. We must pay for the fabulous equipment and expensive medications underlying this progress. Indeed, people can outlive their resources, especially if there’s an extended stay in a long-term-care facility.

One response to these realities would be to rethink 65. Have we always believed in 65 as the right age for retirement? No. But we certainly think today that we have the right to retire at 65.

If that’s not a natural right, then where did the number come from?

It’s a fair question, and answering it requires a brief tour into history. In America, retiring at 65 was broadly established when Social Security became the law of the land in 1935. Why did Social Security choose 65?

German Chancellor Otto von Bismarck, looking to thwart the growing popularity of Marxism, introduced the first national pension plan in 1889.  The eligibility age was initially set at 70, a milestone reached by few workers. In 1916, Germany lowered the retirement age to 65, thus setting the benchmark that’s now used by pension plans everywhere.

But that was more than a century ago, and we live much longer now. Should we continue to use 65 as the right age for retirement? To get specific, if we want to have the same balance between our working years and retirement years as we had back in 1935, we would move the fulcrum of retirement from 65 to 72.

Now, let’s go back to that pivotal financial decision I mentioned at the start. Workers can claim Social Security benefits as early as 62 and as late as 70. What’s the difference in annual benefits? To make it fair, for each year a worker defers claiming, the amount of their benefit is increased by as much as 8%. By waiting to claim until 70, a worker can get a cumulative benefit increase of 76%. The benefits are also adjusted upward to offset inflation.

Imagine that a worker continues to work for those eight years. That’s eight more years of Social Security and retirement account contributions, eight fewer years of withdrawals, and eight more years of returns on the worker’s investments. All those eights add up. Waiting eight years for Social Security would at least double, and might well triple, a worker’s retirement assets. Rather than having too little retirement security, it would lift her up to having enough—and possibly even more than enough—for retirement.

When to claim Social Security may well be the most important financial decision most workers will ever make. We know, however, that most people do not understand their choices or even how to decide which course is best for them. For those of us who are financially knowledgeable, are we not our brothers’ keepers? Isn’t it our responsibility to be sure every worker understands the questions—and arrive at the answer that’s really right for them?

Charles D. Ellis is the author of 18 books, including Winning the Loser’s Game, which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale’s investment committee.

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