Retirement Age and Changing Lifespans

Not too long ago, I was at the library researching an article on Social Security and the value people could expect to get from it using historical numbers. (I decided not to do the post because it requires some prediction of the politics in the future.)

As I was looking for information, I came across a table that compared life expectancies between today and when Social Security was established in the 1930s.

According to the 1940 Census, the average American who survived to age 65 could expect, on average, to live another 12.8 years.

On the other hand, in 2007, the average American who survived to age 65 could expect, on average, to live another 18.6 years.

In roughly three generations, the average older person has added six years to their life.

That fact alone is one of the biggest reasons why Social Security is struggling. The system was designed to pay for 13 years of living (on average) but it’s now being asked to pay for 19 years of living (on average). The only way that works is by cutting benefits or increasing the amount of money people pay in.

But what does it mean for you?

For starters, you can’t plan for retirement like your parents and grandparents did. Many, many things have changed. Social Security is stretched (to put it nicely). You’re going to live longer and be in good health for longer, too. All of those things change the retirement equation.

The key, to me, is the fact that we live longer in good health than before. Let’s say, hypothetically, that people want to retire with 7 years of decent health and 5 years of ailing health before the end of their lives.

In 1940, that means you’d retire at 65. You’d still have 7 years of decent health and 5 years of ailing health ahead of you, on average.

In 2007, that means you’d retire at 72. Again, you’d still have 7 years of decent health and 5 years of ailing health ahead of you, on average.

Even if you chose to be retired in good health for two more years, 70 has simply become the new 65 in terms of retirement age. In terms of the full scope of a modern American life, 70 is just as appropriate of a retirement age as 65 was to our parents and grandparents.

So why not plan accordingly? In the future, when I talk about retirement calculations on The Simple Dollar, I’m going to start with the assumption that people will retire at 70 rather than at 65. This changes the math on many aspects of retirement saving.

What exactly changes? For starters, starting early becomes even more vital because it becomes even easier to hit your goals if you start at 25. After all, if you sock away $1,000 at age 25 and get a 7% annual return on it, it will be $21,000 at age 70. Wait until 45 to sock away that money and it only turns into $5,500.

It also means that you don’t need to cram quite as much savings into each year. Starting at age 25, you’re changing your period of savings from 40 to 45 years. That means there’s less pressure to contribute a giant amount each year.

It also makes early retirement a more realistic goal. Retirement at 65 means that you currently have almost two more decades of living ahead of you. If you can pull off an earlier retirement than that, you have a lot of years of financial independence coming your way.

The numbers lead me to believe that 70 is the new 65 and, before long, 75 will be the new 65. I’m planning accordingly and I hope you do, too.

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