Retirement Age: Is 70 the New 65?

Many studies suggest that Americans are not saving enough for retirement and that a retirement crisis is looming. Alicia Munnell, director of the Center for Retirement Research at Boston College, has co-authored a book entitled Falling Short: The Coming Retirement Crisis and What to Do About It, due out in January. She spoke to Morningstar.com about the book's major themes, including rethinking what is considered the normal retirement age.

Morningstar: We hear the term "retirement crisis" a lot these days, yet what that term actually means can vary widely. Tell us how you would define the retirement crisis that we currently face?

Alicia Munnell: I'm not sure we are facing it right now. It's going to occur as most people retire on their 401(k) accumulations, which are going to be inadequate.

Morningstar: So, basically, is it how much people are saving for themselves that you see as the main area of crisis, or is it something larger?

Munnell: It's a much larger problem. I hope the strength of the book is that it takes a broad look at retirement savings. Basically, the need for more retirement savings has increased because people are living longer, face rapidly rising health-care costs, and at the same time the sources of retirement income--Social Security and employer-sponsored plans--are decreasing [in terms of providing that income]. Then, you put those two [the need for more retirement savings and what people are actually saving] together and you just have a mismatch, and the gap between the two is going to grow over time.

Morningstar: So, is the problem more due to people's current savings rate or to this increase in life expectancy?

Munnell: I think it's probably equal [in that you have] growing retirement needs because of increased life expectancy and rapidly rising health-care costs and low returns on assets, all things which would make you think that people are going to need a bigger pile [of money]. Social Security is also going to provide relatively less [for some retirees]. ... As the full retirement age increases and goes from 65 to 66 to 67, the amount that you get at 65 decreases. It goes as an actuarial adjustment, but it's equivalent to a cut in benefits. So, it can manifest itself one of two ways: Either you wait until the new retirement age to get your benefit, in which case you get [the full] benefit, or you take your benefit when you would have otherwise and you get a smaller amount.

Morningstar: One of the more intriguing ideas in your book is recalibrating the American mindset to view 70 as the new normal retirement age as opposed to 65, as it has been for many years. Can you discuss how you arrived at this idea?

Munnell: So, 70 is actually the age [at which] you get the highest benefit under Social Security. Your benefit is actuarially adjusted up to that age. After 70, you should grab your benefit because you don't get any further increases for delaying. So, I don't think the message is even out there that that's the age at which you get your full benefits. We should tell people because that might affect their plans. But educating people on how much you gain by delaying claiming is a really important step that could be taken.

Morningstar: You also recommend that people take a serious look at working longer, presumably working until they reach that full retirement age of 70.

Munnell: I think, if possible, that's what people should do. Of course, not everybody can do that. But I think for those who are healthy and can do their jobs well--and that's an increasing number of people--they should keep in the labor force and keep working until 70.

Morningstar: There will certainly be those who won't be too pleased to hear you advocate that we all work an extra five years, especially toward the end of our lives. What would you say to those people?

Munnell: I'd say a lot of things. I'd say, first of all, I understand perfectly well that some people are simply not able to work longer. But for those who can, then the choice is either you work longer, you retire on less, or you save more.

Morningstar: We've talked a lot about the income side--delaying benefits, working longer. Should people be prepared to spend less in retirement?

Munnell: Those are the three logical possibilities, right? If you're finding you're going to have a shortfall in retirement, you can either live on that shortfall or you can save more or you can retire later. Those are all ways to solve that problem. I think that the ideal thing would be to be a little bit more frugal in retirement and work a little bit longer and save a little bit more. But I think it's important that you mentioned that--I'm talking about five years [of working longer]. So, we're not talking about people working into their 90s. So, this is sort of a manageable solution to a very big problem.