What is My Optimal Retirement Age?

Anthony Watson |

A seemingly simple question of "what age should I retire?" is actually quite complex when one considers their personal definition of retirement and their unique set of personal circumstances.  To help think through how to answer this question, we can first look to the history of retirement for some helpful context.   

History of Retirement

Prior to the 18th century, the average life expectancy of people was between 26 and 40 years old, so most people worked and contributed until they couldn't.  As the world industrialized and life expectancies increased, people were beginning to reach an age where physical impairments became obstacles to working.  Older workers were slowing down factory lines, missing work, and occupying jobs that more youthful workers needed.  Conditions worsened during the Great Depression, as unemployment of 3.2% in 1929 steadily rose to a high of 24.9% by 1933.  President Franklin D. Roosevelt proposed the Social Security Act of 1935 as part of his Great New Deal program to encourage older workers to retire.  Defined benefit pension plans gained traction following World War II's boom years as companies offered pensions to attract and retain talent.  In 1965, Medicare was signed into law to provide health care coverage for those 65 and over. Additionally, Americans became wealthier during the sustained period of economic growth following World War II, and retirement was viewed as both desirable and affordable.  Labor force participation of people aged 65 or more steadily declined and bottomed in 1985 at 10%.

Since 1985, however, the labor force participation rate among those aged 65 and over has steadily increased.   This new trend has emerged as a result of many factors.  First, today's 65 year old is healthier and has greater expected longevity due to tremendous advancements in health care and medicine.  Living longer is fantastic, but it also means potentially being retired for longer.  The expectation of being retired longer means greater financial resources are needed, as are plans for spending the additional time in a rewarding and enjoyable way.  Second, most jobs today in the United States require less manual labor, enabling workers to remain productive much longer than in the past.  In fact, there is a positive correlation between retirement age and educational attainment since education generally opens the doors to greater job quality and satisfaction.  Third, defined benefit pension plans have steadily given way to defined contribution plans (i.e., 401k), reducing the amount of "guaranteed" lifetime income a retiree can bank on in retirement.  Psychologically and behaviorally speaking, most individuals find spending down savings from an investment portfolio more difficult and less assuring than receiving a set amount of income for life, whether this apprehension is warranted or not.  

What is Retirement Today?

So what is retirement today? Most people think of retirement along some combination of the following:

 A Culturally Acceptable Number  

While not as relevant as it once was when employees had a more defined anchor point in the form of a defined benefits pension plan where after a long career with a single employer, they retired at a predetermined defined age and went with the flow. Today's anchor points are 59.5, 62, 65, 67, 70, and 72.  At age 59.5, retirees can begin withdrawing funds from their retirement accounts penalty-free.  At age 62, covered retirees become eligible to claim Social Security.  At age 65, retirees are eligible for Medicare.  At age 67, those born in 1960 or later reach full retirement age (FRA) under Social Security.  After age 70, there is no further benefit to deferring claiming Social Security.  At age 72, a retiree must begin making required minimum distributions on their qualified retirement accounts.  

A Financial Number

This consideration usually boils down to the financial feasibility of retiring. Everyone's number will be different depending upon how they want to live in retirement and the length of time they want to meet essential and discretionary expenses.  Other inputs to determining this number include other assets/resources, risk profile, asset allocation, portfolio construction, social security claiming, tax management, withdrawal order sequencing, and spending flexibility.  Not easy, but fortunately, this can all be modeled and sensitivity/probability tested using Monte Carlo and/or historical simulation analysis and be boiled down to a number.  It is here that most individuals retain the services of a financial advisor to conduct retirement planning.  Retirement planning is essential, but all advice and retirement planning are not created equal, so please read the following article to learn more:  Steps That Should Occur in a Proper Retirement Planning Process.

Dis-utility of Work

Does work bring you joy and provide you with meaning?  Work can provide a person with many benefits.  Some people find a strong identity in their work and enjoy the mental challenge work can bring.  Some people also enjoy the relationships, and social opportunities work provides.  Deciding to retire by choice means that you find more potential utility in retirement than continuing to work.  

 A Total Cessation of Work

Some people define retirement as a total cessation of work.  In this case, there is no utility to work and only utility to freedom of time and leisure.  Only after one can completely stop any and all work do they feel retired.

Freedom of Time

Some people feel retired if they have the freedom of time to do what they want to do.   Whether this means work, leisure, or the perfect combination of both.  It is this definition of retirement that has led to a boom in phased retirement.  Many people find utility in working but also want more time for leisure.  To bridge that gap, one can gradually exit the workforce by adding flex time, reducing hours, or entering a consulting arrangement.  Phased retirement provides one with the continued utility work brings while also allowing for more time for leisure activities.  Many employers are all too willing to offer employees this kind of arrangement as it allows for a smoother transition and greater transfer of knowledge to the new employee trying to fill your shoes.

Elements from all of these possible definitions fit together to help someone determine the right age to retire.   Obviously, a great deal depends upon an individual's unique perspectives, goals, and resources.  It also assumes one is not forced into retirement because of their own health or the health of another, creating the need to caretake.

Four Possible Paths

There are four possible paths when you boil it down with two limiting factors: 

  1. Retirement by necessity
  2. Work by necessity
  3. Retirement by choice
  4. Work by choice

The first limiting factor is health.  Your health, or the health of another, could fail, forcing you to retire.  The second limiting factor is financial.  If you are healthy but cannot find a way to afford retirement, you must keep working.  If you are healthy and have the financial resources to retire, you can then choose to continue working or not.  

According to J.P. Morgan Asset Management research, the median retirement age in 2020 was 62, whereas the median expected retirement age was 65.  

If you are ready to start modeling to better understand your financial number, we stand by ready to help.  Contact us here at any time.