The correct age for retirement is hotly debated in the financial services industry—a recent ThinkAdvisor report cites industry sources putting the age at 65, 70 and even 80. Viewed subjectively, or on the basis of popular opinion, many different answers are possible.
But a new analysis by Alicia Munnell, director of the Center for Retirement Research at Boston College, argues that objectively speaking, 70 is the de facto retirement age — at least as far as maximizing Social Security benefits is concerned.
Despite today’s confusing array of benefit-claiming possibilities, the benefit structure resulting from claiming Social Security at age 70 makes sense as a benchmark for income adequacy given current longevity and retirement saving trends.
In fact, Munnell argues that maintaining the current structure without the official “full retirement age” (currently 65 or 66, depending on year of birth, and scheduled to move to 67) would serve to clarify Americans’ retirement choices.
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That is because, first of all, the focus on 65, the age set when Social Security benefits were first paid in 1940, does not jibe with contemporary conditions in which men and women both live on average seven years longer than they did then.
(Check out 65? 70? 80? What’s the Real Retirement Age These Days? on ThinkAdvisor.)
Were we to keep the expected number of years in retirement constant, the retirement age in 2020 would be 72; a more liberal calculation that would evenly distribute longevity gains between added time for work and leisure implies a retirement age of 70.
The calculations grow in complexity when considering socioeconomic factors — for example, the fact that the wealthiest 5% live 25% longer than the bottom 5%, a discrepancy that is actually growing wider over time.
While such factors make it difficult to design a fair benefit structure, Munnell argues the most useful metric in evaluating Social Security is the so-called replacement rate — that is, looking at benefits as a percent of preretirement income.
The system currently offers actuarially fair benefits at whatever claiming age, meaning that the reduced income of the 62-year-old Social Security recipient and the enhanced benefits of the 70-year-old will work out to be equal on a lifetime income basis.