Young clients with decades until retirement often do not know when they want to retire. That far out, pinpointing an age is not terribly important because their situation is likely to change and what they want now might not be what they want then. In these cases, we will often begin by projecting what retirement could look like at 65 and adjusting from there.
A client recently asked me to explain this choice in age. It was a reminder to me that this “standard retirement age” is only a given to me because I think about retirement every day.
The first instance of 65 being retirement age comes from Germany. In 1881 Germany started the first old-age insurance program which set the eligibility age at 70. In 1916, Germany would lower the bar to age 65.
When the Social Security Act was signed in 1935, retirement as we think of it was virtually unheard of. People worked until they physically could not and then their family would support them. As the economy changed and families spread out, older generations would need support from someone other than their children. Similar to Germany’s program, Social Security was meant to be the safety net to provide a measure of financial security to the elderly population in the U.S. Social Security benefits also started at 65.
The 65 benchmark was mainly the result of precedent. The few private pensions from the time, many state run pensions and the Railroad Retirement System all used age 65 as retirement age. Actuarial studies from the time also supported age 65 as a fiscally prudent choice. Few people lived long beyond that age so benefit outlays would be reasonable given expected tax revenues.
Social Security reached more Americans than other pensions, public or private, and spread the idea that 65 is retirement age.
Retirement age for Social Security now ranges from 66 to 67 due to amendments passed in 1983. Benefits can be taken as early as 62. According to the Social Security Administration’s Annual Statistical Supplement, 65% of women and 58.3% of men who claimed retirement benefits in 2014 were between ages 62 and 66 (based on entitlement dates). Given the earnings test before full retirement age, a good portion of these people are retired or not earning a substantial income. This suggests that in reality, 65 is not the standard it used to be and many people are leaving the workforce earlier.
Is 65 still relevant?
Many retirees are concerned about paying for health care after retirement. Medicare begins at 65. Those who retire before 65 need to find health insurance – either through COBRA, private insurance or on the exchange – when they roll off an employer’s health plan. This can add thousands of dollars to a person’s annual expenses. I often work with people who are planning on retiring no sooner than 65 for this very reason.
To the young clients I was working with, 65 was just a placeholder. I picked it because 65 is historically what people consider to be “retirement age.” As these clients near retirement, we may determine if retiring earlier than 65 is financially feasible. Or they might not be personally ready to stop working then and want to continue in the workforce, at least in some capacity, as long as possible. There are many factors that determine when someone actually retires. Social insurance eligibility is only a piece of it.
Want to learn more? The Social Security website is a trove of information on the history of economic insurance and Social Security. https://www.ssa.gov/history/index.html