Congress has approved several new laws impacting employer-sponsored 401(k) plans but still hasn’t addressed Social Security, which the government says will run out of money by 2033 if nothing is done.
People are living longer and drawing benefits longer than anticipated when the law was enacted in 1935 when the average U.S. lifespan was 61 for men and 65 for women. A male born today is expected to live till 74.5; a female till 80.2.
A proposal by a bipartisan group of U.S. senators, led by Maine independent Angus King and Republican Bill Cassidy of Louisiana, is among several efforts to overhaul Social Security. It would, among other things, increase the age for receiving full benefits to 70. That is expected to face stiff opposition in Congress and among senior advocacy groups.
“We’re seeing it in France right now,” says Curtis Ray, retirement planner and CEO of MPI Unlimited. “The initial reaction by the public is riots and protests because individuals work so hard, starting at 18, expecting a certain benefit to happen that they were promised. And now they talk about raising the age or cutting the benefits.”
Currently Americans can take early benefits at 62, but the full retirement age is 66 or 67, depending on the month and year of your birth.
“There is no painless way to get around this,” says Denis Poljak, partner, managing director and wealth advisor at Poljak Group Wealth Management at Steward Partners in Shreveport, Louisiana. “I think this is going to affect everyone, but it’s one of those necessary evils that needs to be done in order to keep the system solvent.”
Here’s a look at the impact of raising the retirement age to 70:
- Retirees already receiving Social Security benefits probably won’t be affected.
- Those who take benefits early would be impacted the most.
- It might encourage people with high 401(k) balances to take RMD earlier.
- It’s unclear what may change for those who wait until 70 to can get a bigger check.
- Retirement income planning would become even more critical for retirees.
Those Already Receiving Social Security Probably Won’t Be Affected
“I don’t think that will impact anybody who’s already on existing benefits,” says James Regan, financial advisor and partner with SharpePoint in Phoenix. “If you’ve already elected Social Security, you kind of made that handshake with the federal government.”
“The good thing is the government usually grandfathers people in,” Ray says. “It probably would not affect the people that are 63 right now. It affects the people who are 30.”
Those Who Plan to Take Benefits Early Would See the Most Drastic Impact
A third of recipients take Social Security early at 62, according to the Social Security Administration, and about half take benefits before full retirement age. They are likely facing the biggest changes.
Moving the full retirement age to 70 would also very likely increase the early retirement age, possibly to 65. It also probably means that more workers would die before they qualify.
Those who take Social Security benefits at age 62 lock in monthly benefits of 30% less than if they waited until full retirement age. Waiting until 70 means benefits would increase another 8% annually from full retirement age.
“These people who had these aspirations of retiring as early as possible or having a little bit more free time, a little bit more supplemental income, their plans will be devastated,” Ray says. “They’re going to have to continue to work for another three years, depending on what their health is or have to go without, and that’s even a worse scenario.”
Poljak says another possibility is that they leave the early retirement age at 62, but with a significant reduction in benefits.
Those With Large Retirement Balances May Be Encouraged to Take RMDs Earlier
Even though most people say they will retire between 65 and 67, most retire earlier – at 61 – because of job loss, poor health or caregiving responsibilities. Regan says people should consider spending taxable money from retirement accounts and/or converting to tax-free Roth accounts to help bridge the gap between retirement and reaching the higher retirement age. It would also reduce taxes in later years.
The Secure Act 2.0 increases the age for required minimum distributions to 73, and eventually to 75. RMD is the minimum you must withdraw from retirement accounts once you reach a certain age.
“I think it’s a good thing to start to spend some that taxable money now and/or do some Roth conversions now to reduce your required minimum distributions so that we fill in that gap of 65 to 70,” Regan says. “Ultimately we’re trying to reduce the distribution, so you don’t really end up in these massive RMDs and the huge tax bracket increases because your Medicare Part B premiums are based on your income.”
The Advantages of Waiting Until Age 70 to Get a Bigger Check May Disappear
“For the people who were working or did not need the income, it always made sense,” Poljak says. “It made sense for them to delay Social Security to 70 because they will get an annual increase of 8% in the benefits. So that’s going to go away. If the normal retirement age becomes 70, in the end, this is really will affect the people who need the money at 62 or people who were planning to retire earlier the 70.”
Retirement Income Planning Would Become Critical
“It’s going to change a lot,” Poljak says. “This will make it ever so more important to prepare for retirement. This is a big-time change. It was always important to plan for retirement. So, we are recommending people to reach out to qualified financial advisors, preferably certified financial planners to plan for retirement and really see the impact that this might have on their retirement income.”
Ray says you should start learning about financial planning when you are in college, even if you save only $200 to $300 a month. “If you can start at 20 years old, you can be a millionaire by 60. It’s not a lot of money if you start early,” he says.
“Instead, they start in their late 30s or 40s,” Ray says. “And at that time, you have to save $1,000 or $1,500 a month. And it’s much more complicated to save that much money when you have kids and family and school and all those other things.”
Regan says going forward, there will be lots of moving parts in Washington when it comes to retirement. “Legislative deals are getting rushed,” he says. “Secure 2.0 happened Dec. 29, and the rules went into effect Jan. 1, 2023. And you, the taxpayer and the recipient and the retiree, now have to find advisors who are very much on top of not only legislative risk, the tax risk, but longevity risk, and how all those things kind of get mixed into the retirement picture.”