Last Week’s Question of the Week: What is the average age that people retire in the United States? Age 62 or age 72?
ANSWER: Age 62
HOST: Your topic today seems very applicable to what many of us are thinking…should I retire early? Or perhaps more like can I retire early? I think you are going to review some considerations and implications if one does decide to retire sooner than they originally projected?
KLAAS FINANCIAL: We usually encounter two different types of people; some who tell us they want to work as long as they are able, and others who tell us they want to retire as soon as possible. Sometimes the retiring sooner is not an option due to financial considerations. However, sometimes retiring sooner is forced upon us due to health considerations.
So, yes, this is a question that we have been hearing more frequently the last couple of years… can I retire sooner, or even should I? Remember that retirement isn’t an age, it’s a financial number. There’s no law that says you have to work until you’re 65.
We would encourage our listeners to think through this decision carefully before deciding to make this transition to your post-career life. Many people are fixated on a certain age that they wish to be done with their current job, or at least gain a sense as to how much longer they can stick it out on the job in terms of physical or mental stamina.
- Planning for retirement: According to the Employee Benefit Research Institute’s 2017 Retirement Confidence Survey, the average age most people think about retiring is the age of 65, mostly because of the tie with having health insurance through Medicare at 65 which we will address a little later.
- Reality: A survey from Allianz Life Insurance Company in January of 2020 finds that half of Americans retired earlier than they expected. Most respondents said that they did so for reasons outside of their control, with 34% citing job loss and 25% health-care issues. These results which were drawn in January still point to a trend that likely may be amplified with current economic conditions.
Some people have heard of the F.I.R.E. Movement which stands for “Financial Independence, Retire Early.” The caveat to this process is the goal to save and invest very aggressively where you put away somewhere between 50-75% of your income so you can retire sometime in your 30’s or 40’s. This mindset may be popular for current and future generations, but for our listeners probably doesn’t apply. For many of our listeners who are considering an early retirement, the earliest we typically see is age 50-55.
HOST: So, what things do we need to consider if we are thinking about an early retirement?
KLAAS FINANCIAL: Here are some potential drawbacks to retiring early:
- Lifespan: Consider that the average lifespan in the U.S. in 2020 is just shy of 80 years. If you retire in your 50s or earlier, your savings may need to last for more than three decades. Since you have spent probably three to four decades accumulating your retirement nest egg, upon retirement you will need a withdrawal strategy in order to not be at risk of outliving your savings for a longer retirement.
- Reduced retirement contributions: Consider that if you retire 5-10 years early, you are losing those years when you normally would be putting away a lot in retirement contributions into your portfolio.
- Reduced Social Security Benefits: Remember that Social Security benefits are calculated based on 35 years of earnings. If you don’t work for at least 35 years, zeros are averaged in and result in smaller retirement payments. Remember that generally you cannot start receiving normal social security benefits before the age of 62, and at age 62, payments are reduced unless you wait until your full retirement age to begin benefits. (Your full retirement age depends on the year you were born and is 67 if you were born in 1960 or later).
- Risks to your mental health: Believe it or not, for many people not going to a place of work or reporting to someone else on a regular basis could lead to a sense of loss. Many people derive their identity from their work and retiring may leave you with feelings you weren’t expecting such as a loss of connection, worth or value. If you don’t have a plan for how to spend your time, the new hours in your schedule could lead to boredom and loneliness whereas work provides social, mental and physical stimulation. If you don’t have hobbies lined up and commitments with friends or volunteer organizations in place, it could become difficult to maintain a sense of purpose.
HOST: I would imagine that you need to consider what you are going to do about health insurance if you retire before age 65?
KLAAS FINANCIAL: Yes, this is one of the first questions we ask our early retirees– what are you planning to do between now and age 65 for your health insurance? Because retirement knows no official age, there are some parameters to be aware of in terms of benefits:
While 62 is the age at which you can start receiving Social Security retirement benefits, 65 is the age at which you become eligible for Medicare. Medicare eligibility kicks in just before you turn 65. Typically, there is a 7-month initial enrollment period that begins 3 months before you turn 65, includes the month you turn 65, and ends 3 months after you turn 65. Visit Medicare.gov to learn more about eligibility and getting started with Medicare.
So, the question remains, how do you pay for and navigate the world of health insurance when you retire between the 62 to 65 age range (or if you retire even younger)? You’re not yet eligible for Medicare which means you could experience a gap in healthcare benefits. So, if you plan to retire before age 65 and even if you’ve only got a month or two before Medicare, going without any health insurance can be a bit of a gamble. It could mean dipping into your retirement savings to pay for unexpected healthcare expenses. And premiums can be expensive. Here are some common options:
- COBRA: You may be eligible for COBRA continuation health coverage, which allows you to remain on your employer’s plan for a certain amount of time. You may be required to pay up to 102% of the plan cost (this includes the amount you and your employer paid for coverage plus 2% for administrative costs). Generally, COBRA applies to all group health plans maintained by private-sector employers with 20 or more employees. Speak with your employer for details, or learn more about COBRA at the Department of Labor website.
- Spouse health insurance: If your partner has access to job-based health insurance, you may want to find out if you’re eligible to be added to the plan and find out what the premium may cost.
- Veteran’s Health Insurance: If you’re a veteran who served with honor, you’re eligible to enroll for VA Health Care. The Veterans Health Administration is America’s largest integrated health care system with more than 1,700 VA medical centers and outpatient clinics across the U.S. If you served in the active military, naval or air service and are separated under any condition other than dishonorable, you may qualify for VA health care benefits. National Guard and reserve service members who have completed the full call-up period of active duty can apply.
- Affordable Care Act: If you are retiring more than 1 year before age 65, you may be looking a purchasing Major Medical Insurance, or through the Affordable Care Act. You should go to Healthcare.gov to look into costs and if you qualify for income-based subsidies this could be a solution as this can lower your monthly premium. This health insurance is guaranteed issue regardless of your health history, and they must cover pre-existing conditions.
HOST: Are there any other places to get early health insurance when you are under age 65?
KLAAS FINANCIAL: Yes, you can consider these ideas:
- Short term medical health insurance & Hospital Plan Bundles: During the in-between time right before turning 65, a short term policy may be the right solution. Short term plans provide coverage for 30 to 364 days depending on your state.
- Medical Insurance Cooperatives: These are in a few states that began through the Affordable Care Act with 23 co-ops. There are now 4 that currently still operate, one of which is in Wisconsin and is known as Common Ground Health Care Cooperative.
- Faith-Based Health Care Plans: These plans offer a more affordable alternative to health insurance with comparable benefits. These plans are often referred to as medical sharing plans. A group of like-minded people come together to share healthcare costs under the banner of a faith-based organization.
- Part-time work at companies that offer health insurance: One example would be Starbucks.
This Week’s Question of the Week: Social Security Benefits are calculated from how many of years of earnings? Is it 25 or 35 years?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.