Next year, those born in 1959 in the United States will have to adapt to a new reality. The age to receive full Social Security benefits rises to 66 years and 10 months. It's just two months more than for the previous generation, but those months make a big difference.
This adjustment is not a coincidence. It comes from a law dating back to 1983, designed to gradually extend the retirement age. Although it seems like a minimal change, it implies important consequences for those planning their retirement.
What does this change mean in practice?
Previously, the full retirement age (without reductions) was 65 years. But since the 1983 reform, this age has been slowly increasing until it reaches 67 years for people born from 1960 onward.
For those born in 1959, the key age will be 66 years and 10 months. That means if they claim their pension earlier, they will receive a lower payment for life.
For example, claiming retirement just one month early can reduce the check by about 1.07%. If, on the other hand, they decide to wait until age 70, the benefits can grow by up to 8% per year. This margin between claiming early or delaying the application can make a big difference in quality of life during retirement.
Strategies to face the new scenario
It's not easy for everyone to wait until this new age. Many do not want to, or can't, work full time until age 67 or beyond. That's why there are several strategies to balance finances while delaying full retirement:
- Gradual retirement: Reduce the workweek to three or four days. This way, a person keeps an income and can cover health insurance and basic expenses.
- Cash reserve: Save between 18 and 24 months of expenses in liquid accounts, to avoid selling investments during difficult times.
- Extra income: Rent out a room, a parking space, or take on part-time jobs at companies that offer health benefits.
- Bridge jobs: Some large retailers allow people to work part time with health coverage, making it easier to have a stable income without the pressure of a full-time job.
Smart withdrawals and tax optimization
The way money is withdrawn from retirement accounts also affects the sustainability of retirement. Ideally, people should start by using taxable accounts first and let tax-advantaged retirement accounts keep growing.
Contributions to a Roth IRA allow people to withdraw money without taxes or penalties, easing the pressure before Medicare.
Reducing adjusted gross income can also allow people to access health subsidies that make insurance more affordable until they reach Medicare coverage at age 65.