61 Is The New...65?

Why 61 could be a pivotal age for retirement planning.

I stumbled across a couple of articles that curiously both pointed to 61 as being a potentially important age for retirement planning but I think they both missed an important point that further supports the notion of 61 being important.

The first link is from Investment News recapping work done by Morningstar's David Blanchett. The basic takeaway from his research is that someone who plans on retiring in their 50's is actually likely to work longer than they think and someone planning to retire in their late 60's or older will likely work shorter than they think. The way David's math works out, 61 is kind of a fulcrum point as people targeting that age tend to be correct.

I don't doubt the math or the data but it does seem like there are behavioral and/or circumstantial factors here as well. I think this is a useful reminder of things not always going as we plan/hope for. The word resiliency comes to mind with this information. You want to retire at 55, maybe, but you get to 54 and realize you're not there yet numbers wise, what do you do? Obviously something has to give, either you stay in the same job, making the same money with the same savings rate or maybe you can figure out how to increase that savings rate for a few years (hopefully shorter if you'd wanted to retire at 55). Another route might be to downsize your job into something you enjoy more than your career even if it pays less. Something new, that you truly enjoy could be like a second wind where you end up working (and by extension not drawing from your portfolio and delaying Social Security) for a relatively long time.

A more difficult scenario might be planning to work until 70 believing that is the only way to make the numbers work but needing to retire earlier. The younger retiree being short of money has more optionality. Thinking you need to work until 70 but needing to stop at 69 is going to be relatively easy to manage, less so of course for the person at 66 or 64 or even younger.

This is where resiliency comes back into the conversation by confronting where you are in relation to where you hope to be for retiring. If you're projected savings rate combined with a conservative expected rate of return makes you think you need to work until 70, you need to have a plan b. The solution could be as simple as just downsizing your house. That is simple as in it is an obvious solution but could be difficult emotionally also there is work involved to get a house ready to sell, actually selling it and then moving. I've written a few posts on this where it is plausible to sell, buy something much smaller for cash and add $100,000-$150,000 to existing savings.

Joe Moglia said no one will care more about your retirement than you and the idea of not being able to retire when you plan to do so would seem to be exactly what he had in mind. The above are examples of obstacles that need to be assessed and then overcome. Overcoming them requires honestly answering some difficult questions and the willingness to make compromises.

The other link was from ZeroHedge about millennials' collective desire to retire at 61 despite not having any savings. It seems appropriate to quote our friend Bill from here in Walker who once said "you can figure it out now or you can figure it out later, but if you figure it out now you'll be much happier." I've shared that quote dozens of times here.

There are countless conflicting news stories about how much money millennials are or are not saving so maybe the reality is best thought of as a moving target. I don't know that someone who is 25 or even 30 needs to focus on saving for retirement so much as just putting away for the future. The future probably means retirement but could mean other things that I would sum up with my new favorite word; optionality. A house purchase could be part of this equation or time in between jobs or some sort of adverse scenario. The important thing I would argue is the act of putting some away if at all possible.

The older millennials do need to have some focus on retirement, the oldest ones turn 38 this year. Here's a table from BusinessInsider that provides some benchmarks for how much people should have saved at various ages;

The concept has a big flaw, what matters is spending not income. I would not get too caught up feeling bad if you're short or feeling overly proud if you're ahead. Whatever you have will be your reality and the more you have in relation to your spending needs the easier this will be. What is also easier for most people is the spending side of the ledger. If you're 60 and things aren't looking so hot you likely have more control over spending than you do growing your savings. Your solution could be in just cutting back.

But maybe you do have a lot of control over saving at age 60. Maybe you cut back on spending so you can save more. As we looked at the other day, you can put up to $44,900/yr into tax deferred accounts until age 65, at the age you can't contribute to HSAs but can contribute to other accounts. Ten years of averaging $40,000/yr can go a long way to catching up for most folks.

A crucial point that I would add to this conversation about the age of 61 is getting 35 years of work in to go toward your calculated Social Security benefit. SS is figured based on your 35 highest earnings years. If you only earn wages in 32 years then you will have three zeroes that go into that calculation. That may not actually matter to you but it is worth understanding. By the time 61 rolls around you're very likely to have the full 35 years worth of earnings. Moving beyond the idea of years where you have zero earnings, at 61 you're very likely to take your college years out of your calculation as well as your first couple of years after college if you didn't make that much. In summer between my freshman and sophomore years of college I spent the summer working as a painter, I think I made $4000 for two or two and half months and that was my only income that year. I'm still a couple of years from having that summer drop of my SS calculation, it would be my preference that a summer job when I was 20 (I took a year off and worked at Charles Schwab's headquarters before college) not figure into my retirement.

If it is true that America's retirement prospects are grim, then the best chance for overcoming that outlook is tackling this head on and solving our own problems.

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Flying Robot
Flying Robot

I was curious about the 35 year effect some year ago, and ran my numbers. I think the advantage is pretty flat scale; there seems to be marginal strategic advantage to achieving it. I mean, working longer always improves the payouts, but I don't see any strategic inflection point that makes me want to fill all 35 salary years(?) In my case, going from 32 years to 35 years gets me $1200 per year, if I have the calculation right, about $400 per year for each extra year I work. Going from 35 years to 39 years gets me another $1500, so $375 per year, for each year more I work. Going from 39 to 44 nets another $1400, or $280 per year, for each year I work. The rate doesn't change much even as those last few zero-earning years roll off, and then later as the low-earning years also drop away. I think the tiered structure and factors in the SS calculation make this true for most income levels(? I haven't done those calcs, just basing that statement on the factor impact at lower income levels, and the 0.15% Tier 3 for higher income levels that work together to make SS payout progressive in nature.) Working longer gets you a slightly higher payout, but I think the extra earnings you make over those years is likely to be more important than the impact of filling the 35 salary slots for SS. Do these conclusions strike you as reasonable?