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Thayer Partners Blog

Planning for Retirement: Why 70 Is the New 65

[fa icon="calendar"] Jun 17, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Planning_for_Retirement-_Why_70_Is_the_New_65.jpgMost folks plan to retire at 65. After all, that’s what they’ve been told to do for so long, it just seems natural. But people are living longer and enjoying better health well into their retirement years—which means they need more money to offset their lengthened lifespans. One way to do this is simply by working longer. Yes, it’s true—70 is the new 65.

A Looming Crisis

In “Falling Short: The Coming Retirement Crisis and What to Do About It,” Boston College economist Alicia H. Munnell, previously Assistant Treasury Secretary during the Clinton administration, runs through most of the bad news we already know: workers are living longer, not saving enough or planning for retirement during their working years, health care costs are high and interest rates low, and 401(k)s aren’t working because people are making mistakes.

A key result of this situation is that more and more, people are deferring retirement to 66, 67, or even later. The problem? They’re not deferring retirement long enough to offset the “extra” years in their lifespan.

The Work/Retirement Ratio

Munnell makes a stark point: for most workers these days, the work/retirement ratio is off if they retire at the age of 65. That means that they’re living a larger portion of their lifespans in retirement than any previous generation.

Consider this: if you are going to retire at age 70 in 2020, and entered the workforce at age 20, you’ll have the same work/retirement ratio as someone who retired at age 65 in 1940. Each generation after 1940 has had to retire a little later in life to maintain that ratio. Now, well into the 21st century, workers need to add 5 years to their working years to maintain that ratio. The good news is that the generation that’s about to retire is enjoying better health longer than their grandparents and parents did, which means they can keep working—and often, they want to keep working too.

A 21st-Century Strategy?

Munnell suggests that simply working to age 70, instead of retiring at 65, is enough to offset living longer. Her strategy is straightforward: work longer, be retired for a shorter period of time, and contribute more to employer plans and Social Security. Working longer should also mean you’ll get higher Social Security benefits when you do retire.

Munnell goes on to say that increasing Social Security taxes by 2.68 percentage points would help, as well as investing some Social Security assets in equities. Another idea she has is to make 401(k) plans savings mandatory and automatic.

You Need More

That strategy isn’t exactly a sound way to go about planning for retirement. For one thing, there is always the off-chance that you’re unlucky enough not to enjoy the good health some of your peers do. Not everyone is going to enjoy great health at age 70 and some will be forced to retire early. And at the end of the day, some people simply want to retire earlier.

There’s also no guarantee that Social Security will continue to award higher benefits to people who “opt” to retire later. There’s also precedent for changing the minimum retirement age, which has already happened in France and Canada. If 70 is really the new 65, Social Security might change to fit this new reality, meaning lower benefits.

Another issue is that people tend to make mistakes with their portfolios, which means they don’t grow as they’re expected to. Engaging a good financial advisor might be a solid idea.

The Bottom Line

You still need to be planning for retirement, whether you want to retire at 60, 65, or 70. Too many people make mistakes and mismanage their retirement savings. Get ahead of the game by planning for retirement now.

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Topics: Planning for Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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