Do you dream of retiring at 65? If so, you’re not alone. Since the early 2000s, the percentage of American nonretirees planning to retire exactly at 65 has ranged from 24 percent to 28 percent, found a 2015 Gallup poll. But retiring at — or before — 65 isn’t a realistic goal for everyone.
According to the same Gallup poll, nearly 40 percent of non-retired Americans expect to retire after age 65, an increase of 31 percent since 2009. And, 67 percent of workers age 50 and over plan to work past age 65 — or don’t plan to retire, found a 2015 report by the Transamerica Center for Retirement Studies.
There are some uncontrollable reasons people might not be able to retire at 65. For example, many workers are unable to save adequately for retirement because pensions have gone away and wages have been stagnant for years. But what it really comes down to is planning. If you haven’t planned well, retirement at 65 might be unlikely — and even unwise. Here are eight reasons why you should plan on working past age 65.
1. You’re Relying Only on Social Security
The average monthly Social Security benefit for retired workers as of June 2016 is only $1,348.49. However, the total annual expenditures among older households (age 55 and older) averaged $49,279, according to the Bureau of Labor Statistics, which analyzed data from the 2014 Consumer Expenditure Survey. For individuals ages 65 to 74, the average was $48,885.
If you do the math, you’ll realize that you can’t rely solely on Social Security to fund your retirement; a monthly check of barely $1,400 likely won’t cover all of your expenses — housing, groceries, clothing, etc. — during retirement. So, if you planned on retiring at age 65 and only factored in monthly Social Security checks into your retirement savings plan, you might want to adjust your retirement age and find other sources of income.
Fortunately, delaying your retirement beyond your full retirement age can increase your Social Security benefits. For example, if you were born in 1943 or later, your yearly rate of increase is 8 percent — how many places these days can you find a guaranteed 8 percent return on your investment?
Keep in mind, however, that your benefits increase is based on your date of birth and the number of months you delay the start of your retirement benefits. And once you reach 70, the benefits increase no longer applies.
2. You Have Insufficient Savings
One in three Americans has $0 saved for retirement, found a recent GOBankingRates.com survey. More than 40 percent of millennials surveyed don’t have any retirement savings, and nearly 30 percent have less than $10,000 saved. But, this younger generation isn’t the only group behind on retirement savings; the survey found that nearly 30 percent of both Generation Xers (ages 35 to 54) and baby boomers and seniors (ages 55 and up) have $0 saved for retirement, too.
Although there is no way you can know how long you’ll live, based on current life expectancy rates, you will likely live longer than your parents or grandparents. So, the money you save will have to last throughout your non-income-producing years.
If you haven’t already done so, contribute to a workplace retirement plan, such as a 401k or IRA. If you’re self-employed or your employer doesn’t offer a retirement plan, use these five proven ways to save for retirement.
3. You’re Stuck With a 30-Year Mortgage
Frank Nothaft, former chief economist with Freddie Mac, wrote in 2013 there are three reasons why many homebuyers flock to the 30-year fixed-rate mortgage: affordability, stability and flexibility. A longer mortgage loan term, however, could prevent you from retiring at age 65.
I hear so many clients tell me that they picked the longer term with the intention of paying it off early. But if you’re 50 years old and decide to refinance with a 30-year term, you’ll be making mortgage payments until you’re 80 years old. On the other hand, choosing a 15-year term at age 50 gives you freedom from a mortgage payment at 65. And generally, the shorter the term, the less you’ll have to pay in interest over the life of the loan.
If you want to retire at 65, start creating a low-debt lifestyle. Having no mortgage goes a long way toward that goal.
4. Your Short-Term Strategy Is the Stock Market
Some financial experts will tell you that investing in the stock market is a long-term retirement savings strategy — not a short-term one. So, counting on the markets to boost your savings over a relatively short period of time likely won’t get you a sizable nest egg. And if you choose the wrong year to retire and you’re counting on the markets to get you through, you might be headed for serious trouble.
Get help in projecting your future needs; meet with a certified financial planner or a financial advisor to help you determine just how much money you’ll need to retire. Then, “oversave” in order to sustain yourself for what could be 30 years or more in retirement. Also, as you draw closer to retirement, move some of your investments into conservative, income-producing assets and look for guarantees.
5. You’re a Victim of Sequence-of-Returns Risk
Perhaps you’ve done a great job saving for retirement. You plotted out your course, and now you’re ready to step into retirement while you can still enjoy it. Then, “sequence of returns” rears its ugly head.
If you experience negative returns early on in retirement when you start making withdrawals, you might exhaust your funds earlier than expected, illustrated a hypothetical example by MFS Fund Distributors, Inc. However, if the negative returns occur later on, your assets might last longer. That’s essentially what’s called sequence-of-returns risk.
So, someone retiring when stock prices are down will likely see a decrease in their portfolio’s overall return. Meanwhile, a retiree who retires when prices are up will likely experience higher overall returns.
Say you have $1 million, and you think you can sustain a $40,000 annual withdrawal. But, the market in the first year of your withdrawal goes down 50 percent. Now, each dollar you take out is like taking $2. Worse, the market just went down 50 percent — and now you need a 100 percent return to get back to where you were.
The sequence of your return can have an enormous effect on how long your assets last. If you decide to retire at age 65 but you exhaust your assets early on during your retirement, the worst-case scenario might involve you returning to the workforce to supplement your retirement income.
6. You Didn’t Account for Social Security Taxes
Know what your potential taxes on Social Security benefits will be before deciding to retire at 65. If you didn’t factor in Social Security taxes into your retirement savings strategy, you might not be ready to retire at this age. Instead, you might need to work a little longer and save up more money to make up for any savings you’ll miss out on because of Social Security taxes.
The good news: You will not have to pay federal income tax on more than 85 percent of your Social Security benefits. But, you might have to pay some taxes, depending on your income and how you file your tax returns:
If you file an individual federal tax return and…
If you file an individual federal tax return and…
*If you file a joint tax return and…
*If you file a joint tax return and…
You [and your spouse*] have a combined income that is…
between $25,000 and $34,000
|more than $34,000||between $32,000 and $44,000|
more than $44,000
You may have to pay income tax on up to…
50% of your Social Security benefits
|85% of your Social Security benefits||50% of your Social Security benefits|
85% of your Social Security benefits
Source: SSA.gov (Social Security Administration website)
If you are married and file a separate tax return, the SSA states you will “probably” have to pay taxes on your Social Security benefits.
7. You’re Retiring During Bad Economic Conditions
Many Americans lost a significant portion of their wealth during the economic downturn of 2008 and 2009 — and many of those people were approaching or in retirement. In fact, the Employee Benefit Research Institute estimated in February 2009 that 401k balances of more than $200,000 had an average loss of more than 25 percent from Jan. 1, 2008 to Jan. 20, 2009.
It’s impossible to be certain you have picked the right year to start your retirement, so you must allow for every eventuality. Carefully plan using investment products that have guarantees where possible or predictable conservative results elsewhere. Sit down with a distribution specialist, a professional who works with people who are ready to retire.
The closer you get to retirement, the more planning you will need.
8. You’re Just Not Ready to Retire
For many people, work is a joy that enables them to feel useful and productive. Others retire and say they never want to set foot in an office again.
Before you decide to retire at 65, ask yourself: “How will I fill my days?” If you can’t come up with anything, perhaps this is a sign you’re not ready to retire just yet.
Or, maybe you dream of traveling. But without a steady income, will it be feasible? In this case, you might want to try working out a more flexible schedule with your employer that allows for more time off.
Many people retire only to find themselves looking to re-enter the workforce a short time later — either for economic reasons or because they had a short list of things to do and a lot of time left over.
Keep Reading: 21 Questions to Ask Yourself Before Deciding to Retire
In the end, the ability to retire at age 65 — or any age — will require planning. For my clients who really want to retire early, I suggest taking a mock retirement for six months. Live on the amount you think you’ll need in retirement, and put every extra dime away as if you no longer had an income.
Many people have an unrealistic plan of living on less than their current income after they retire. Since you can’t turn back the clock, seek guidance and save as much as possible during the years between the empty nest and retirement.
Sydney Champion contributed to the reporting for this article.