For decades, the age of 65 has been considered the quintessential “magic number” when it comes to retirement in the United States. This age has been tied not only to the age when many Americans choose to stop working but also when they can begin collecting Social Security benefits. However, as we move into 2025, that age is changing—at least for some Americans. Starting from 2025, those born in 1959 will see their Full Retirement Age (FRA) for Social Security benefits shift from 65 to 66 years and 10 months. This change, while seemingly small, has profound implications on individuals’ financial planning, retirement goals, and how much they receive in Social Security benefits.
Understanding the Change in Full Retirement Age
The concept of Full Retirement Age (FRA) has undergone several changes over the years. Under the Social Security Amendments enacted in 1983, the U.S. government gradually raised the FRA from 65 to 67. The adjustment was phased in over a period of time, meaning individuals born after 1937 saw their FRA increase incrementally. However, those born in 1959 will have an FRA of 66 years and 10 months, and for individuals born in 1960 or later, the FRA will be 67 years old.
This new shift will impact millions of Americans who have already planned their retirement around the idea that they could begin collecting Social Security at 65. Though the shift is only two months for those born in 1959, it signals a broader trend towards delaying benefits and further complicates the financial planning process.
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The Impact of Delayed Retirement on Social Security Benefits
Social Security benefits depend not only on the age at which you begin collecting them but also on the age at which you choose to stop working. The amount of your monthly benefit can vary significantly based on these factors.
- Early Retirement: The earliest you can begin receiving Social Security benefits is age 62. However, opting to retire early comes with a significant reduction in your benefits. If you start receiving benefits at 62, your monthly payout will be reduced by around 29% (for those born in 1959) or 30% (for those born in 1960 or later).
- Full Retirement Age: If you wait until your FRA to begin collecting benefits, you will receive your full, unreduced benefit. For those born in 1959, the FRA is 66 years and 10 months, while for those born in 1960 or later, it will be 67.
- Delayed Retirement: If you decide to delay your retirement past your FRA, your monthly benefit will increase by 8% per year until you reach the age of 70. For example, if you wait until the age of 70 to begin receiving benefits, you could see your Social Security benefits increase by as much as 32% compared to starting at FRA.
This change in the FRA highlights the importance of carefully considering when to start collecting benefits. The financial impact of starting early versus waiting until later can be significant over the course of your retirement.
Strategies for Early Retirees: Bridging the Gap
While the idea of delaying retirement until 67 (or longer) might not appeal to everyone, there are several strategies for those who wish to retire earlier without negatively affecting their financial security. Below are a few practical approaches that can help bridge the gap between your desired retirement age and the delay caused by the change in FRA.
- Phased Retirement:
Instead of fully retiring, you may consider a phased retirement plan. This could involve reducing your hours to part-time work, which can help you maintain some income while easing into full retirement. For example, working 3-4 days a week could provide enough income to cover essential costs such as groceries, health insurance, and utilities, all while not depleting your savings as quickly. - Maintaining a Cash Reserve:
Having a solid cash reserve is essential, especially for those retiring before they can access Social Security benefits. Financial advisors recommend saving enough to cover 18 to 24 months of living expenses in a high-interest savings or money market account. This emergency fund will allow you to live comfortably in the early years of retirement without relying on Social Security or retirement savings. - Renting Out Extra Space:
Renting out an unused room, basement, or parking space can provide an additional stream of income. This is particularly beneficial in urban areas where rental demand is high. For example, renting out a spare room could generate $700–$1,000 per month, and renting a parking space could earn $150–$300 per month. - Part-Time Jobs with Benefits:
Many large retailers, such as Costco, Home Depot, and Trader Joe’s, offer part-time workers benefits like health insurance. By working 20-28 hours per week, retirees can secure health insurance benefits and earn extra income, which can help offset the gap in Social Security benefits.
Tax Planning and Smart Withdrawal Strategies for Retirement
One of the most important aspects of early retirement planning is ensuring that you minimize your tax liability and withdraw funds in the most efficient manner. Here are some strategies for tax-efficient retirement withdrawals:
- Withdraw from Taxable Accounts First:
It is generally advisable to withdraw money from your taxable brokerage account before tapping into retirement accounts like IRAs or 401(k)s. This strategy avoids early withdrawal penalties and allows your retirement accounts to continue growing. - Utilize Roth IRA Withdrawals:
With a Roth IRA, you can withdraw your original contributions at any time without paying taxes or penalties. This makes it an excellent choice for those who retire early and want to avoid Social Security benefits while supplementing their income. - Maintain a Low MAGI (Modified Adjusted Gross Income):
If you reduce your income during early retirement, you may qualify for subsidies on health insurance under the Affordable Care Act (ACA). By keeping your MAGI low, you can significantly lower the cost of health insurance premiums, saving you thousands of dollars each year. - Consider Side Income Options:
Many retirees opt for part-time or freelance work, such as online tutoring, pet-sitting, or freelance writing. These side jobs can provide additional income without requiring a full-time commitment. Additionally, these types of jobs often don’t come with the same tax burdens as traditional employment.
The Possibility of Future Increases in the Retirement Age
As the United States faces challenges with its Social Security Trust Fund, there are discussions about whether the Full Retirement Age (FRA) will continue to rise. Projections show that the trust fund may run out of money by 2034, leaving Social Security with only 81% of promised benefits. In response, the government is considering several options to address this shortfall, including increasing the FRA to 68 or 69 years.
This makes it even more important for those planning for retirement to remain flexible with their financial strategies. Building up cash reserves, maintaining part-time work, and carefully managing retirement withdrawals will be crucial in adapting to potential future changes in Social Security.
Why Planning for Social Security and Retirement is Critical
Retirement today depends on more than just reaching a certain age—it requires careful financial planning and a strategic approach to withdrawals, tax management, and income diversification. The increase in the Full Retirement Age (FRA) from 65 to 67—or beyond—may seem minor, but it underscores the growing complexity of the Social Security system and the need for individuals to be proactive in their retirement planning.
As you prepare for retirement, keep these key principles in mind:
- Build adequate savings and emergency funds.
- Consider phased or part-time retirement to ease into the transition.
- Develop tax-efficient strategies for withdrawing retirement funds.
- Stay flexible and be prepared for potential increases in the retirement age.
By adhering to these strategies, you can ensure that you are financially secure and able to retire on your own terms, regardless of how the Social Security rules evolve in the future.
Conclusion
The change in the Full Retirement Age (FRA) for Social Security benefits serves as a reminder that financial planning for retirement is becoming increasingly complex. With Social Security’s evolving policies, it’s essential for future retirees to stay informed, flexible, and proactive in their planning. By adopting sound strategies for saving, investing, and withdrawing funds, individuals can navigate these changes and ensure a secure, fulfilling retirement.
FAQs
What is the new Full Retirement Age for people born in 1959?
The Full Retirement Age (FRA) for individuals born in 1959 is 66 years and 10 months, starting in 2025.
What will the FRA be for people born in 1960 or later?
For individuals born in 1960 or later, the FRA will be 67 years.
How much will Social Security benefits be reduced if I retire at 62?
For people born in 1959, benefits will be reduced by about 29% if you start receiving them at age 62. For those born in 1960 or later, the reduction will be about 30%.
Can I increase my Social Security benefits by waiting past my FRA?
Yes, for every year you wait past your FRA, your Social Security benefits can increase by up to 8% per year, until you reach the age of 70.
Will the Social Security retirement age increase further in the future?
There is ongoing discussion about raising the FRA to 68 or 69 to address funding shortfalls in the Social Security Trust Fund, which is expected to run out by 2034.
