The conventional wisdom has long held that retiring at 65 is the golden age of retirement, a time when one can finally relax and enjoy the fruits of a lifetime of hard work. However, this notion is not only outdated but also potentially harmful, as it fails to account for the significant financial and health risks associated with early retirement. In this article, I will delve into the reasons why retiring at 62 can cost the average American a staggering $250,000 in lifetime income, and why it's time to rethink our retirement framework.
The 65 Myth
The idea of retiring at 65 has its roots in the late 19th century, when German Chancellor Otto von Bismarck established it as the basis for Germany's national pension system. The retirement age was initially set at 70, but it was later lowered to 65 to make the system more affordable. This number was then adopted by Franklin Roosevelt in the United States in 1935, when Social Security was introduced. At the time, this made sense because most Americans were not expected to live long enough to collect benefits.
However, times have changed. Today, a 65-year-old American man can expect to live another 18 years, while a woman can expect to live another 21 years. This means that the conventional idea of retiring at 65 is no longer sustainable, and it's time to reevaluate our retirement framework.
The First Multiplier: Social Security
One of the biggest financial risks facing American retirees is the decision to claim Social Security early. By retiring at 62, individuals lock in a permanently lower benefit, which can be as much as 30% less than the full retirement age benefit. Waiting until 70 can increase the benefit by about 77% compared to claiming at 62.
For most Americans, delaying Social Security is the single highest-return financial decision available to them. Leaving the workforce to claim benefits early may feel like a good decision, but in reality, it can cost them a significant amount of money over the course of their retirement.
The Second Multiplier: Sequence-of-Returns Risk
Retiring at 62 instead of 67 also adds years to the most fragile financial phase of retirement, which is the decumulation window. During this time, individuals begin withdrawing from their savings to live, and withdrawing during a market downturn can lock in losses that permanently damage retirement security.
This is known as sequence-of-returns risk, and it can be particularly damaging during early retirement years. A 15-year retirement is one mathematical exercise, but a 35-year retirement is entirely different. The portfolio that looked durable at 65 may look fragile at 80 when markets sell off, inflation rises, and there is still a decade or more of life ahead.
The Third Multiplier: Cognitive Decline
The third multiplier is perhaps the most insidious. A working paper from the National Bureau of Economic Research found that leaving the workforce led to measurable cognitive decline among American men aged 51 to 64, while staying in the workforce led to greater sustained cognition.
This is particularly relevant for retirement planning, as late-life financial decisions can be complex and require mental capacity. Retiring early not only stretches finances but also degrades the very instrument needed to manage them. Cognitive decline during aging does not announce itself; it shows up in mistakes, forgetfulness, and errors in judgment.
A Different Architecture
The answer is not to work until 80, as people burn out and bodies wear out. Instead, we need to re-architect retirement for a 30-year second act instead of a five-year one. This means staying engaged in work that gives the brain a reason to show up, paid or unpaid, and stopping to treat 65 as the finish line.
It also means building a guaranteed income floor that can last into the eighties and nineties. This means planning to 95 and stress-testing to 100. The decision of when to claim Social Security should be treated as a longevity bet, made once, with no second click.
In conclusion, retiring at 62 can cost the average American a quarter-million dollars in lifetime income, and it's time to rethink our retirement framework. By understanding the financial and health risks associated with early retirement, we can build a retirement plan that is sustainable and secure for the long term.
