Retiring at age 62 instead of 67 costs the average American roughly $250,000 in lifetime income, according to new research highlighted by Fortune. The financial impact stems from locking in a permanently lower Social Security benefit and extending the retirement period by five years, increasing exposure to market risks during a vulnerable phase. This finding challenges the long-held belief that early retirement is an unequivocal reward.
The research, based on data from the National Bureau of Economic Research and reported by Sasha Rogelberg, explains that retiring early amplifies longevity risk in three ways: reduced Social Security benefits, a longer decumulation window vulnerable to sequence-of-returns risk, and accelerated cognitive decline during a period when financial decisions become more complex. The retirement age of 65, often seen as a biological milestone, was originally set by German Chancellor Otto von Bismarck in 1889 as part of Germany’s pension system, not based on health or longevity data.
This analysis underscores the financial and cognitive risks associated with early retirement, highlighting a shift in understanding retirement planning. The extended retirement period increases the likelihood of outliving savings, while cognitive decline can impair decision-making during critical years. The $250,000 figure quantifies the lifetime income lost due to these combined factors, providing a stark contrast to the conventional wisdom that early retirement is a straightforward benefit.
The research draws on historical pension policy origins and contemporary economic and neuroscience data to quantify the costs of early retirement. The next major Social Security policy review, scheduled for 2027, will consider adjustments to retirement age and benefits amid evolving demographic and economic trends.