Planning to retire at 65? Most Americans stop working years earlier — and not because they want to.
The typical American retires far earlier than he or she expects to, and it's often not by choice, according to new research from the Transamerica Center for Retirement Studies.
The median retirement age in the U.S. is 62, with nearly six in 10 retirees telling the research firm that they stepped back from the workforce earlier than they had planned. Almost half of those people said the reason came down to health issues, such as physical limitations or disability. Losing a job or an organizational change at their employer were among the other reasons people stopped working before they planned to retire.
"Financially precarious"
The findings underscore the fragility of retirement in the U.S., with older Americans often finding themselves retired before they're financially ready to call it quits. And with many people outliving earlier generations — the typical respondent told Transamerica they believe they'll live to age 90 — they're also facing the prospect of supporting themselves financially for several decades in retirement, which can easily stretch or even exhaust their savings.
"Many of them are financially precarious — if they were to have some sort of major financial shock or their health would decline and needed long-term care, they would have a hard time affording it," Catherine Collinson, CEO and president of the Transamerica Center for Retirement Studies, told CBS MoneyWatch.
The research backs up previous research about the typical retirement age, with the nonprofit Employee Benefit Research Institute finding earlier this year that the median retirement age for Americans is 62. That underscores a gap between retirement plans and reality, with business leaders and policy experts often urging Americans to work longer so they can save more for their old age — a strategy that often doesn't unfold as envisioned.
Retirees forced to leave their jobs earlier than planned is a "cautionary tale for people currently in the workforce," Collinson said.
People should actively maintain their health and keep their skills up to date, while also educating themselves about retirement and financial planning, as well as socking away savings, she noted.
Why Americans claim Social Security early
Retiring before a person expects may explain why millions of Americans claim Social Security before they reach their "full retirement age," or the age at which they are entitled to their full benefits.
Retirement experts generally urge Americans to hold off on claiming Social Security as long as possible because of the financial benefits of waiting. Workers can file for the retirement benefit as early as age 62, but the tradeoff is a roughly 30% reduction in their monthly checks compared with waiting until full retirement age, which is either 66 or 67 depending on one's birth year.
But the median age when Americans claim Social Security benefits is 63, Transamerica found in its survey of more than 2,400 retirees. That means many older Americans are locking themselves into permanently lower monthly checks throughout their retirement.
On the flip side, waiting until age 70 to collect Social Security — the maximum age to claim benefits — provides a boost of more than 30% to one's monthly benefits. Despite that incentive, Transamerica found that only 4% of retirees wait until 70 to file for their benefits.
"One of the most important things they can do is fully understand their benefits, and if they have any options to stretch out those benefits," Collinson said. "If it's a spousal situation, maybe if they need the income, one claims first and the other later, or if they can jump back in the workforce and hit the pause button on Social Security and get more income."
Another reason for claiming Social Security early is likely that many retirees may not have enough money put away in a retirement fund to keep them afloat. Only about half of U.S. retirees participated in a 401(k) or similar plan throughout their working careers, while more than one in four said their employer never offered retirement benefits while they worked, Transamerica found.
Still, recent research from researchers at Duke University's Fuqua School of Business and Cornell University found there's a psychological element behind claiming Social Security early. People who had a stronger sense of ownership of their Social Security benefits — the idea that the payments "are mine" — were more likely to claim early, as well as those who have a higher sense of loss aversion, they found.
The idea that Social Security benefits are "owned" by an individual isn't exactly correct, because the Social Security payments received by a retired person are funded by current workers (as well as the agency's trust funds), rather than from an individual's lifetime contributions.
People who are loss averse may be tempted to claim early because they're fearful they'll receive little to nothing in Social Security benefits if they don't live long enough, John Payne, a professor emeritus at Duke and one of the paper's co-authors, said in a statement.
About 6 in 10 retirees cited Social Security as their primary source of income, underscoring the importance of the program for older Americans. By comparison, only about 1 in 10 said retirement accounts like 401(k)s or IRAs would be their main source of income.
Challenged but happy
Despite the challenges, many retirees are sanguine about stepping back from work, the study found. Almost 9 in 10 described themselves as being generally happy and having close relationships with family and friends.
"One of the things that stands out is retirees are really enjoying their time in retirement, which I think bodes well for all of us," Collinson said. "They've made some adjustments, especially to their financial situation, and overall they are doing well."
Americans "dream of retirement," she added. "Retirement is more about freedom and the ability to spend their time as they want to, rather than it is financial freedom specifically."