The traditional retirement age of 65 has its roots in historical, economic, and social developments that shaped modern retirement systems. One of the key milestones was the introduction of Germany's social insurance program in 1889 under Chancellor Otto von Bismarck. This system established 70 as the retirement age, later reduced to 65 in 1916, setting a precedent for other nations to follow. At the time, reaching 65 was considered a significant achievement. Life expectancy was much lower than it is today, making retirement benefits accessible to only a minority of the population.
In the United States, the Social Security Act of 1935 further solidified 65 as the retirement benchmark. The decision to select this age was partly influenced by actuarial calculations and political considerations. Policymakers aimed to strike a balance between offering financial support to retirees and maintaining the sustainability of the program. At that time, the average life expectancy was around 61 years, meaning many workers would not live long enough to collect benefits. This made the system financially viable in its early decades.
Cultural norms and workplace dynamics also played a role in cementing 65 as the retirement age. In the mid-20th century, labor-intensive jobs dominated the economy. Workers often faced physical exhaustion by their 60s. Retirement was seen as a well-deserved respite after decades of hard work.
The age of 65 became synonymous with transitioning from the workforce to leisure, supported by pensions, savings, and government benefits.
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Increasing Life Expectancy Makes Retirement Planning More Important
As life expectancy has increased dramatically—reaching nearly 80 years in many developed nations—the traditional retirement age has come under scrutiny. Critics argue that 65 no longer reflects the realities of modern life, where people are living healthier and longer. Moreover, financial pressures, such as rising healthcare costs and inadequate retirement savings, compel many to work well past 65.
Conversely, people like me advocate for earlier retirement, emphasizing that time is more valuable than money once basic needs are met. It's way better to retire early than to retire rich because time is infinitely more valuable than money. For this who already have enough and are still spending time not doing what they love, I fear they will look back on their life with regret.
Despite these debates, 65 remains a symbolic milestone. For many, it represents the promise of freedom from work and the ability to pursue personal passions. Yet, it also highlights the importance of adapting retirement systems to the changing demographics and financial needs of the population.
Lowering The Traditional Retirement Age To 55 From 65
Despite increasing life expectancy, we could potentially lower the traditional retirement age to 55 from 65 in America. Why? Because Bill Begen, father of the 4% Rule, now believes a 5% safe withdrawal rate is appropriate in retirement.
In the past, his 4% Rule was for traditional retirees retiring at age 65 and withdrawing at a 4% rate for 30 years before running out of money. With a 5% safe withdrawal rate, the inverse is 20X versus 25X for a 4% safe withdrawal rate. If we used to believe that accumulating 25X your annual expenses in net worth is enough for you to retire, than a 5% withdrawal rate suggests one only has to accumulate 20X their annual expenses. This is a 20% decline.
Using simply math, decreasing the traditional retirement age of 65 by 20% equals 52. To be conservative, we can round up the traditional retirement age to 55, given earnings power in one's 50s is often much higher than in one's 20s, 30s, or 40s.
Being able to buy back 10 years of your life to do whatever you want is significant! How much of your net worth would you give to gain back 10 years of your life? I would gladly give back at least 80% of mine.
The 4% Rule Is Outdated
I’ve critiqued the 4% Rule, arguing it’s outdated because of how much times have changed since the 1990s when Bill first popularized the concept. So much has changed over the past 40 years. It's important we change with the times.
Today, with financial giants like J.P. Morgan, Vanguard, and Goldman Sachs lowering their stock and bond return forecasts, maintaining a 4% withdrawal rate—let alone considering a 5% rate—feels unrealistic.
However, I never thought Bill Bengen would actually increase his safe withdrawal rate recommendation to 5%. But here we are based on new research and analysis.
Followed A 0% Safe Withdrawal Rate In Early Retirement
Since semi-retiring in 2012, I haven’t followed a 4% withdrawal rate. Instead, I've followed a 0% safe withdrawal rate as I've continued to generate supplemental retirement income online and through part-time consulting. My wife also worked for three years after I retired, before she negotiated a severance package and retired at 35 .
I've withdrawn at a 0% safe withdrawal rate to a -10% safe withdrawal rate because of inflation, risk aversion, and a growing family. With two young children in private school and a spouse without a traditional job, I need to be more conservative at this time of my life. Only after the kids have graduated college in 17 years, will I probably withdraw at a higher safe withdrawal rate.
A -10% withdrawal essentially means increasing our net worth by 10% through active income generation. As a result, our net worth has steadily grown since our retirements in 2012 and 2015. At this pace, we’ll likely end up with more than we need, which would be suboptimal. But I would also like to give some money to my children to help jumpstart their adult lives and also create a foundation for charity.
My Conversation With Bill Bengen, Creator Of The 4% Rule
If you're doubtful about lowering the traditional retirement age to 55 from 65, have a listen to my conversation with Bill Bengen. He goes through his research findings of 400 retirees, sharing that the average safe withdrawal rate was actually 7%, or 2% higher than his now recommended 5% safe withdrawal rate.
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Misconceptions About The 4% Rule Cleared Up By Bill Bengen
From my conversation with Bill Bengen, the creator of the 4% Rule, here are some common misconceptions he clarified:
1. It’s a Guideline, Not a Rigid Rule:
Bill emphasized that the 4% Rule was never meant to be a hard-and-fast rule. Instead, he views it as a flexible guideline for retirees in the U.S. However, it’s often interpreted as an unchanging standard. This was eye-opening for me, as I’ve long advocated for a dynamic approach to safe withdrawal rates to account for changing circumstances.
2. The 4% Rate Is Conservative, Not Aggressive:
Many think of the 4% Rule as aggressive, but Bill’s research proves otherwise. His analysis of 400 retirees dating back to 1926 revealed that only one cohort—those who retired in 1968—needed to strictly adhere to 4% to avoid running out of money. The rest were able to withdraw an average of 7% without depleting their portfolios, showing that 4% errs on the side of caution.
3. It Adjusts for Inflation:
The 4% Rule isn’t a fixed dollar amount. Withdrawals adjust annually for inflation to maintain purchasing power. For instance, with a $1 million portfolio, withdrawing $40,000 in the first year would mean increasing that amount to $44,000 in the next year if inflation rose by 10%. This flexibility aligns your spending with real-world economic conditions.
4. It’s Based on Total Return:
The calculation of the 4% Rule is rooted in a “total return” approach. It treats your portfolio as a whole without distinguishing between principal, capital gains, dividends, or interest. For example, with a $3 million portfolio generating $60,000 in annual income, a 5% withdrawal rate equates to $150,000 total—not $150,000 plus your investment income.
These insights from Bill highlight the adaptability and underlying conservatism of the 4% Rule, reaffirming the importance of personalizing your withdrawal strategy to fit your financial situation and goals.
More People Should Consider Retiring Earlier At 55 Or Younger
At a 5% SWR, retirees need 20x their annual expenses saved, compared to 25x under a 4% SWR. For instance, if you require $80,000 annually, the target savings drops from $2 million to $1.6 million. This lower threshold can allow individuals to leave the workforce earlier, provided they've diligently saved and invested. Early retirement offers the chance to reclaim your time and pursue passions, hobbies, or even second careers that align with personal fulfillment rather than financial necessity.
Retiring earlier also allows you to enjoy your wealth while you're still healthy and active. Many retirees express regret about not having enough energy to travel, learn new skills, or engage in physically demanding activities. By retiring at 55 or earlier, you gain the opportunity to make the most of these active years, fostering a richer, more vibrant retirement experience.
Furthermore, early retirement can reduce the stress and potential health risks associated with extended careers in demanding roles, contributing to improved overall well-being. Personally, the best reason I've found to retire early is greater happiness.
For those who still wish to maintain a sense of purpose, early retirement can mean shifting to part-time work, consulting, or passion projects without financial pressure. There are a plethora of things you can do to feel productive and contribute to society.
Careful Planning Is Necessary For Early Retirees
However, the decision to retire early hinges on more than just the SWR. It requires meticulous planning, including considerations for healthcare, inflation, and how to stay meaningfully engaged. Accumulating 25X your annual expenses may not be enough for those who wish to retire even earlier than 55. Life is constantly changing.
Those aiming for early retirement must also weigh the psychological shift from saving to spending, ensuring they have the confidence to draw down their assets. If planned effectively, an increased SWR can empower more people to embrace early retirement and savor the freedom that comes with reclaiming their time.
Diversify Your Investments Into Real Estate
Real estate is my favorite asset class to build wealth. It enabled me to retire at 34 due to a portfolio of rental properties that generate over $120,000 a year. Today, you can invest 100% passively in real estate through private real estate funds offered by Fundrise.
Fundrise manages over $3 billion in private real estate investments. Most of its investments are in the Sunbelt region where valuations are lower and yields tend to be higher. With the Fed embarking on a multi-year interest rate cut cycle, there should be increased demand in real estate in the coming years.
Back when the traditional retirement age was established, real estate wasn't considered an investment for retirement. But today, real estate is one of the best was to generate semi-passive income and retire comfortable. I've personally invested over $290,000 with Fundrise and they are a long-time sponsor of Financial Samurai.
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As I approach the traditional retirement age, I’ve found Boldin’s tools particularly helpful in deciding how much to convert to a Roth IRA. The ability to model various “what if” scenarios has been invaluable for planning my future, especially for when I’m older and less able to manage my finances.
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