The conversation about raising the retirement age has resurfaced in the news. Now there are whispers that the government might consider increasing the full retirement age beyond 67.
No need to worry just yet—the current rules remain unchanged. Still, the topic is significant, and it highlights the need for a flexible approach to retirement planning.
Changes to the Retirement Age
The last significant adjustment by Congress happened in 1983, when they increased the full retirement age from 65 to 67 over a period of two months. This gradual shift is still ongoing. If you were born in 1959, your full retirement age will be 66 years and 10 months by 2025. Since 1960, it has remained fixed at 67. That’s where we stand legally.
Social Security’s primary trust funds are expected to deplete around 2033–2034, which could lead to benefit cuts of about 77-81% unless Congress intervenes. Some budget proposals are floating the idea of raising the full retirement age to 69 or even 70 over time.
The Republican Research Committee suggested the 69-year mark. Meanwhile, the Congressional Budget Office has provided analysis on the possibility of incrementally increasing the age by two months each year. Nonetheless, no plans have been formally approved yet.
How Adjustments to the Retirement Age Affect You
Raising the retirement age has two main implications. First, the “full” benefits will be disbursed later. Second, if you opt for early retirement at 62, your benefits will take a hit. Currently, retiring at 62 could mean a benefit reduction of around 30% for those born after 1960. If the retirement age rises, the reductions will likely worsen unless Congress revises the calculation.
To put it simply, if your full retirement benefit is $2,000, it could drop to about $1,400 if you choose to retire at 62.
Options if You Choose Early Retirement
It’s understandable to want to retire on your own terms. Here are a few strategies that might help:
- Gradual Retirement: Consider negotiating a part-time schedule of 3-4 days a week to cover essential expenses.
- Building a Cash Reserve: Aim to have around 18-24 months’ worth of savings in a safe account to avoid selling stocks during market downturns.
- Monetizing Assets: You could rent out a room or parking space for supplementary income.
- Part-Time Jobs with Benefits: Many retailers, like Costco and Trader Joe’s, offer health insurance to employees working 20-28 hours a week.
How to Manage Withdrawals in Retirement
When it comes to withdrawals, tap into your taxable investment accounts first to let your IRA and 401(k) investment growth continue. If necessary, you can withdraw Roth IRA contributions tax-free. Keeping your adjusted gross income low can also help you qualify for grants under the Affordable Care Act as you approach Medicare age at 65.
For every year you delay past your full retirement age up to age 70, Social Security increases your benefits by around 8%. This can serve as a solid return, especially when compared to current investment opportunities. However, waiting too long might not be feasible, so it’s essential to plan accordingly.
Planning Retirement Without Relying on Social Security
If you’re in your 40s or 50s and uncertain about the future of Social Security, it’s wise to start preparing now. Calculate what you’ll need for a comfortable lifestyle annually, and aim to save approximately 25 times that amount before retirement.
Utilize tax-advantaged accounts like a 401(k), Roth IRA, or health savings account to accelerate your savings and minimize taxes. Any surplus funds could be allocated to a regular investment account with low fees.
Consider tightening your budget a bit now, or even transition a hobby into a source of retirement income. It’s also smart to keep a cash reserve for emergencies without needing to liquidate investments. The goal is to become financially independent rather than relying solely on government support.
While the prospect of retiring at 67 remains, it’s not a guarantee. Developing a plan that accounts for potential shifts in the retirement age is crucial. More savings, strategic withdrawals, or even a side business can bolster your financial security. The landscape can change quickly, so being proactive about your retirement is key.
