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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Greatest respect sir, I own your book and read it twice, with notations. But I differ on an issue. I took my pension at 60 although I didn’t need it. In my case the 60 year old’s start-date monthly funds withdrawl, totalled-up, matched the 70 year olds start date monthly funds, totalled-up, at the age of 79.5. The later start of withdrawal did not surpass the earlier in total until my 80th year. So my decision was not the money amount but that there was a “not so hidden player” in the game… death. Death could cash me out on it’s terms, not mine & I concluded to spend the funds now. If I do survive to 80+ crossover point I will be incrementally leaving money on the table, one month at a time. But then I had fun getting there. (Note: I’m a Canadian, the details differ in amounts but I believe the principles stand)
You need to estimate your life expectancy to see which approach is better (65 vs 70). Obviously delaying to 70 leads to a larger payment amount but how many years will you live after 70?
Not sure about the 62 to 65 period, but in the 65 to 70 period, the 8% increase does not compound. 8% of the full benefit (at 65 to 67, depending) is added each year. If that is followed for the first period too, the increase would be 64%, not 76%.
You’re right about not compounding in those later years. Still, the annualized return over the eight years falls between 7.3% and 7.4%, and the cumulative gain is between 76% and 77%, depending on the year you were born. In other words, if your full retirement age is 66, your monthly benefit might go from $750 at 62 to $1,320 at 70. If it’s age 67, you might go from $700 at 62 to $1,240 at 70. https://humbledollar.com/money-guide/claiming-benefits-early-and-late/
I claimed social security at age 64. That was a mistake. My wife claimed social security at age 62. That was also a mistake. Neither my wife nor me needed the money at the time. I consider my self somewhat knowledgeable in financial matters, but now I know I was not knowledgeable enough. Goes to prove that learning should never stop until the last day of your life. I have read Charlie Ellis’s ‘Winning the Loser’ Game’ and learned much from it.
All insightful points below. Part of my work world used to involve installing retirement plans in businesses — many of them in blue collar industries. One of the most enlightening takeaways from that experience was the enormous financial literacy gap between white collar and blue collar workers (a failure of our education system, if you ask me). Many of those blue collar workers were planning on taking SS at 62 because they were physically worn out, and they had little to no retirement savings. Their game was over, and taking SS at 62 was their only option.
The indivuals I know who took it at 62 did so for one of two reasons:
I hate to be so ungenerous with those No. 2s, but – <shrug>.
The number of people I know who waited until 70 is shockingly low, and they are almost all high net-worth individuals who don’t have to think twice about it.
Reinforces the bit here about,”Worse yet, they don’t know about it, and no one is telling them…”
Just pulled the trigger on Social Security at 70 and it ended up being a 40K income increase, after taxes. My earnings record was much better than my wife’s and she will claim on my record if I check out first. What made this more powerful is that we were able to build a lifestyle around not having that income so this is very much icing on the cake. Inflation and health will be our concerns but waiting until 70 has put us in the best financial position to deal with those issues.
With all due respect, remaining life expectancy of a 65 year old male was 12.7 years in 1940, and 15.3 years in 1990. An increase of 2.6 years is nothing to write home about. You may be conflating life expectancy at retirement, with total life expectancy, the latter of which is primarily driven by reduced infant mortality, and therefore not relevant to retirement considerations.
Further complicating this discussion is the fact that investigation has shown more than half of retirees will not choose to retire, but will rather be forced into early retirement, by age 60.
However, not working, and claiming social security benefits, are separate and distinct events. I fully agree that social security is a key component in retirement planning. Even if not working past age 60, I plan to spend from my retirement savings first, to delay the date I begin taking social security to, hopefully, age 70. It will be expensive, but I view it as slowly purchasing the best deferred annuity available.
@Nick M — With you. 63 and 10 months, so I’m already 2 years into my 8. Laid off at 63 and 2 months. Whatever I work at over the next 6 years, I plan to draw down savings and apply for SS at 70. This math is fine so long as benefits aren’t ever cut and/or means tested.
I took SS at 62, invested the money in a separate account, reinvested dividends, paid back SSA ($134k) at 70 and am well past the break even point of 8 years. No longer available.
Another HUGE fan. Mr Ellis your books have made a difference in my life! What a blessing you have been. Thank you!Thank you!Thank you!
I am a huge fan of Charles Ellis’s books. Do you foresee a day when a strong political middle ground restores fiscal sanity to the US, or should we be concerned about Treasury debt and the continued splintering of our political parties? You are one of the most respected financial authors I trust.
Thanks for the article, Mr. Ellis. It’s an honor to have an investing legend here on HD.
You make a strong argument that raising the full retirement age. No one likes to give up benefits but the fact that average life expectancy in the US has increased from 61 in 1935 to 78 in 2020 makes an increase from 67 to 70 seem reasonable (life expectancy was only 54 when Germany lowered the retirement age to 65 in 1916)..
You are conflating life expectancy at retirement, which hasn’t changed much over the past century, with life expectancy over a lifetime. The later is significantly affected by improvements in preventing infant mortality, which is not relevant to this topic, but seems to be the figures you are referencing. Search “Life Expectancy for Social Security” for an SSA article addressing this common misconception.
Your point is well taken. However, the data in the SSA article still support raising the FRA. In 1940, the average 65-year-old man and woman lived to 77.7 and 79.7, respectively. In 2021, the life expectancy of the average man and woman was 84.0 and 86.6, respectively. Thus, life expectancy for American men and women at 65 has increased by 6.3 and 6.9 years since 1940.
And, of course, those are life expectancies as of birth. If you’re age 65 today, the life expectancy tables suggest you’ll live well into your 80s.
I can understand the financial benefit of waiting until 70 to take your SS, but there could be other non-financial reasons in not working until your 70’s. I’m 60 and plan on working another 3 years or so. My wife is 68 and has been retired for about 2 years now. If I told her I was working another 10-12 years, I won’t be married much longer…We can easily make ends meet with waiting until my FRA of 67 and beyond. Maybe I will, maybe I won’t take it at 67. I like my job in the Accounting/Finance Department and could easily work another 10 years, but we hired a 30-something as my “replacement” about a year ago and I don’t think she wants to wait another 10 years to take my place and I have other things I want to do. I’m glad I have the ability to not work any longer than I want to work.
As it happens, last night I was re-listening to The Index Revolution, which helped completely change how I viewed investing several years ago. Thank you, Charles Ellis, for all the work you’ve done over many years to improve the lives of all Americans.
it really depends on your personal situation, and whether you enjoy your job or hate your job. I retired at age 61, but I had 25 times my salary in financial assets. Other people have no savings at all at age 61, so they’re probably going to be working until they are too old to go on.
In my experience I’d say Americans are very aware of the difference between age 62 and 70 retirement although they view delaying as increasing their benefit as opposed to lessening the reduction which what it actually is.
Even people who do retire early seek was to delay the SS start date, using other assets in the meantime.
But I think it’s more than a collecting strategy. The great majority of those retiring, sometimes not totally voluntarily, need the SS income when they need it and delaying collection is not a viable option.
SS is beyond complex, but the bottom line is when you need the income, you take it. I sometimes question the strategy of using other assets to live on with the goal of increase the monthly SS benefit, something that may never get to add value.
On the other hand, the negative rhetoric about SS and the unrealistic fear that SS is going away no doubt does cause some people to make the age 62 decision based on their susceptibility to false formation.
I began SS at my full retirement age and I was still working, I didn’t need the money and I often question my own decision, but I invested every net penny of those checks in tax free mutual bond funds and have reinvested the interest for the last thirteen years. That monthly interest tax-free is pretty close to the taxable benefit I would have gained from age 66-70 and there is a hefty investment balance to tap a well.
Richard I’ll state the obvious but you’re a much more astute money manager than the vast majority of those near retirement age; I’d venture to guess that the overwhelming majority of those who tap into SS “early” spend (rather than invest) those distributions. On the flip side is the too-frequent scenario where someone simply has to take the early payments to “make ends meet” for reasons planned and otherwise.