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Time to Bury Pew Report on Wealth by Age Group

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Sunday, 03 March 2013 10:46

I realize that Pew is a very prestigious outfit, but Pew's garbage is still garbage. Its report on wealth by age group, or at least the interpretation that it and others have given this report, fits the bill.

A couple of years ago, Pew did an analysis that gave breakdowns of wealth by age group. It found that the median household over the age of 65 had $170,500 in net worth. I was actually pleased that they came up with this number, since it meant that the projections that I had done more than two years earlier with my colleague David Rosnick were almost right on the nose. It's always gratifying to see other researchers independently corroborate your findings. 

But what was remarkable about this report was that the Pew researchers took this number as evidence of the affluence of the elderly. The study points out that this was a 42 percent real increase from the 1984 level. By contrast, households under age 35 saw their median net worth fall by 68 percent to just $3,700. This disparity in wealth by age continues to be the take away from this report in the media.

To realize the absurdity of this position, try thinking for a moment. The bulk of people who are now turning age 65 do not have a defined benefit pension. (They did in 1984.) This means that the only income they have is their Social Security check, which averages a bit over $1,200 a month. Right off the bat, $100 a month is subtracted to pay for their Medicare Part B premium. This means that our high living seniors have an income of $1,100 a month, plus their $170,500 in net worth.

Is this rich? My guess is that 90 percent of the reporters who have covered this Pew study have no clue what net worth means. The $170,000 figure includes every asset that seniors own. That means everything in retirement accounts and other personal savings, the value of their car and the equity in their home. To put this in perspective, the median house price is roughly $180,000. That means that if our typical senior household sold off every other asset they held they would have roughly enough money to pay off their mortgage. Then they would be entirely dependent on their Social Security check to support themselves.

Do the reporters covering this story really think this is a picture of affluence? Will they be happy if they have a retirement where their entire income is their Social Security check?

When David Rosnick and I did our projections we took this as evidence that most seniors and those soon to be retired (the situation looks worse for those near retirement) were likely to be struggling to make ends meet in their old age. Remarkably Pew has managed to convince the country's top reporters that $170,500 in assets can make a person rich, even when it takes $400,000 in annual income to make a person rich when we are talking about raising taxes. This is truly incredible.

I should also point out that the other side of this picture is nonsense as well. Young people never have much wealth, it is not a good measure of their well-being. The 68 percent drop in the wealth of the under 35 population basically doesn't mean anything. (Like many of my friends, I had negative wealth through most of my younger years due to student loans. By age 35, I had probably just barely crossed into positive territory. With a PhD in economics I did not fear for a life in poverty. Many other professionals will be in the same boat.)

What matters far more to young people than their wealth are their labor market prospects. These are indeed awful. However, this is due to the incredible incompetence of the folks running economic policy who are too busy yapping about deficits to notice that the unemployment rate is still 7.9 percent. And yes, unemployment disproportionately affects the young. And the policies (trade, labor, patent, financial etc.) that redistribute income upward will work to the disadvantage of vast majority of young people.

Anyhow, there is a real bad picture facing today's young, but it has nothing do with affluent seniors.

 

Note: several typos corrected. Thanks to the folks who called them to my attention.

Addendum:

I am somewhat at a loss to understand the issue about whether seniors have actually paid off their mortgages or not. Joe Seydl links to an AARP report with data on the topic [http://s3.documentcloud.org/documents/402375/aarp-report-on-older-americans-and-foreclosures.pdf]. But whether or not they actually have paid off their mortgage has nothing directly to do with the issue at hand. We know the typical senior has $170k in wealth. Does it make a difference whether they have $170k in a 401(k) and zero equity in their home or if they have zero savings of any type but they own their $170k home outright? For some reason folks seem to think this is a question of great importance, but I fail to see the significance.

Comments (39)Add Comment
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written by JSeydl, March 03, 2013 12:35
the median house price is roughly $180,000. That means that if our typical senior household sold off every other asset they held they would have roughly enough money to pay off their mortgage. Then they would be entirely dependent on their Social Security check to support themselves.


Dean, I know you make this point repeatedly, but one question: Do we have data on how many seniors actually enter retirement with a mortgage to pay off? Surely some paid off the mortgage throughout their working years, no? I wonder what percent haven't.

Also, a couple of typos:

"The points out that this was a 42 percent real increase from the 1984 level."
Should be: "They point out that ..."

"By contrast, households under age 35 had seen their median net worth had fallen by 68 percent to just $3,700."
Should be: "saw their net worth fall by"

"too budy yapping"
Should be: "too busy yapping"
Homeless Have More Wealth Due to Cell Phones
written by Last Mover, March 03, 2013 1:25
It's a standard statistical tactic to make longitudinal comparisons over time for the same group to claim how well off they have become.

Isolating house prices for seniors in this regard is particularly offensive given:

What the bubble bust did to those prices as well as destruction of employment prospects for near seniors;

The long term erosion of real wages and pensions compared to increases in productitivy;

The dramatic concentration in income and wealth over the relevant period;

The dramatic increase in health care costs over the relevant period;

Senior housing wealth is worth more than in 1984? Really? It's like telling a homeless person he's better off because technology has provided him with a cell phone that can be used anywhere.
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written by mercurino, March 03, 2013 1:36
I want to echo JSedyl's request that Dr. Baker provide a fuller explanation for his oft-repeated mortgage payoff claim. This is probably due to my lack of knowledge, but I'm not sure why Dr. Baker suggests subtracting the median home price from the median net worth of senior households. I would think that the value of seniors' homes actually represents the vast majority of the $170,000+ median net worth. If the median senior household has no (or low) debt, $1,100/month in SS benefits, and $170,000+ in assets, that actually seems like they're doing pretty well. Am I looking at this the wrong way?
Seniors with mortgage debt
written by PeonInChief, March 03, 2013 1:43
JSeydl,
Info on seniors with mortgage debt is here (at page 4):
http://s3.documentcloud.org/documents/402375/aarp-report-on-older-americans-and-foreclosures.pdf

And boomer seniors are more likely to have mortgage debt than our parents because (1) we bought our houses later and (2) we had children later and had to spend more money on their education than our parents had to spend on us. This means that a 30-year mortgage might not be paid off until retirement, and that families refinanced their houses to lessen the burden of student loan debt.

Our parents also benefited from the inflation of the 1970s, in that they bought their houses in the 1960s, but paid them off with post-inflation dollars. My mother's mortgage payment on her 2400sf house was $149, which was a lot in 1962, but petty cash in 1985.

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written by Yastreblyansky, March 03, 2013 1:46
Surely some paid off the mortgage throughout their working years, no? I wonder what percent haven't.

Don't forget how much refinancing was done in the runup to 2008 thanks to all those ARM products and the inflated value of houses. Now those same houses are unsellable at their theoretical market values, and that supposed 42% increase in wealth is making us effectively quite a bit poorer.
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written by KeithOK, March 03, 2013 1:55
If the median senior household has no (or low) debt, $1,100/month in SS benefits, and $170,000+ in assets, that actually seems like they're doing pretty well. Am I looking at this the wrong way?

What it means is that the median senior is living off their SS benefits of $1100 a month. No, I would not consider this "doing pretty well" that after 4 or more decades of working they have no real assets other than their house and have to get by on $1100 a month.
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written by Chris Engel, March 03, 2013 2:18
Let's not forget about the famous "reverse mortgage" programs that they're still pushing on seniors.

Just a way for banksters to encourage seniors to eat away at the inheritances of the next generation.
apples to other apples
written by stephan, March 03, 2013 2:23
- Some numbers are for senior as individual (ave ss benefit), others as household(net worth)

- Accounting for portion of net worth in not-yet- taxed status

- for readers wanting to see how they compare, histograms covering everybody would be more useful than medians, but I can never seem to find one.
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written by urban legend, March 03, 2013 2:31
http://www.motherjones.com/kev...qus_thread

Failing to include the present value of a defined benefit plan in either the current or base year, which seems to be the case, is an oversight of extreme seriousness. It utterly destroys the value of the study.
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written by urban legend, March 03, 2013 2:39
At least one point of significance if the mortgage is paid off is that less income is needed. If it's late in the mortgage and the great majority of the payment is adding to equity, it may not be changing net worth that much, but it is taking liquid income and putting it into non-liquid housing equity.
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written by medgeek, March 03, 2013 3:36
Dean, I have nothing substantive to add except to thank you for this blog. There's so much noise and garbage in print, on line and on the airwaves that it's refreshing to come here to find reasoned analysis of the issues relating to our political economy.
urban...
written by pete, March 03, 2013 4:03
As Dean states, paying off a mortgage by cashing in savings does not increase net worth. It is delevering, meaning less potential for gain in the stock market, which Dean estimates to be very high relative to other estimates. In that sense paying off a mortgage is a bad idea. But the real problem is valuing pensions, though Dean thinks these numbers are small...mostly government employees, I surmise, and union retirees, a shrinking group. The rest of us have 401s or 403s, easy to calculate the value of these. So basically union and govt retirees have more uncalculated wealth than others.

One could also calculate the present value of social secutity...it is an anuity, and folks like Met Life could tell you what it was worth. Of course it cannot be capitalized by the Feds or JD Wentworth...a problem for those with short expected life spans.
Subtracting median home price from senior net worth makes sense.
written by John Wright, March 03, 2013 4:07
written by mercurino, March 03, 2013 1:36
"...I'm not sure why Dr. Baker suggests subtracting the median home price from the median net worth of senior households. I would think that the value of seniors' homes actually represents the vast majority of the $170,000+ median net worth. If the median senior household has no (or low) debt, $1,100/month in SS benefits, and $170,000+ in assets, that actually seems like they're doing pretty well. Am I looking at this the wrong way?"

I believe you are looking at this the wrong way.
Let us take three hypothetical cases, all seniors with 170K net worth. For this example, assume the median home is also valued at 170K.

Senior 1 has no mortgage but no earning financial assets such as CD's, stocks, bonds, since all net worth is in the house. They need to come up with property taxes, food, utilities, medical, transportation completely from their $1100 Social Security check as this is their only income.

Senior 2 has 50% equity in their house (85K) and 85K in financial assets, perhaps earning 5%. If they have a fixed rate mortgage, they may be earning a bit higher on their assets than the mortgage rate, so almost ALL returns from their 85K financial assets go to pay interest (and principal) on their 85K mortgage. These people are not referred to as renters, but they do have a monthly mortgage payment that might appear as rent paid to the bank. Again it is likely their $1100 social security is vital for their living expenses.

Senior three has 170K in financial assets, owns no home, and is renting, so the return from the 170K + Social Security must now cover rent (and imputed property taxes, insurance for their property's owner), utilities...et all. So while they don't have a mortgage payment, they have to come up with rent payment that is probably of similar size to a mortgage payment to finance the house they are living in. Now Senior three might be doing very well (>>5%) in the financial markets, but is that the consistent median case for seniors?

So it doesn't matter very much how the 170K net worth is distributed (be it in housing equity, stocks, bonds, savings), assuming your living expenses for housing and other needs are similar to other seniors AND you cannot achieve large returns on your non-housing financial assets.

The Pew report should have stated that ALL age groups (at the median level) in America are doing poorly and not highlighted the young/old comparison as both groups have poor prospects for increasing their net worth.


...
written by JSeydl, March 03, 2013 4:33
Dean, I didn't link to that AARP report; PeonInChief did.

Nevertheless, I see the point. (And John Wright has a good explanation.) I guess the confusion comes in with the word "net." Why do we keep saying that seniors have a median net worth of $170K when that figure just refers to assets? Most ppl consider net to mean assets minus liabilities.
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written by Kat, March 03, 2013 4:41
This should be the final word on this ridiculous idea that seniors are stealing from the younger generations. Should. Won't be.
Thanks for highlighting how meaningless it is to compare the wealth of under 35's with the wealth of seniors. Prospects are what matters. As for those, as the magic 8 ball would say: Outlook not so good.
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written by thebewilderness, March 03, 2013 5:13
The difference between seniors who have paid off their mortgage and those who have not is that those who have can usually survive on that 1200 a month and those who have not are having an even harder time.
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written by Jay, March 03, 2013 5:30
If any of these seniors are in poor health, then they could easily spend all this money in a year or two on health care and a nursing home/assisted living facility. This shows that people are not saving enough and have been way too risk averse when it comes to investing assuming they have made enough to put aside any savings at all.
uh
written by stephan, March 03, 2013 6:20
Jay says
This shows that people are not saving enough and have been way too risk averse when it comes to investing assuming they have made enough to put aside any savings at all.


If you eat enough catfood to save a dollar, taking risks with it is, well, risky!

Seniors - by definition - have been around long enough to see how the 'investment' vacuum cleaner works. better to just go straight to the casino. At least the busride is free.

JSeydl has a point
written by LSTB, March 03, 2013 7:27
How did Pew define "net worth"?

In 2009, households headed by adults ages 65 and older possessed 42% more median net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984.


...Which should mean that the median older American household that has $170,000 in net worth includes its mortgage balance, if it has one. That, and Social Security.

In theory, older Americans are in the dissaving phase of the financial life cycle. They borrowed young, saved in middle age, and now spend down their savings. The question is whether the $170k is enough to draw down on, irrespective of what you think of reverse mortgages, etc.

Ultimately, our parents aren't obligated to leave us with a posh pile of assets to liquidate after they die, though it's nice when they do.
Bottom Line: Hard & Getting Harder
written by James, March 03, 2013 9:19
Today's latest news is that Obama is willing to cut SS & Medicare to resolve the stalemate. The new OPM is someone who chairs the Walmart Foundation.

For anyone who says $170K is ok or manageable, it's beyond absurd, but dumb or cold-hearted.

Put that $170K number into any retirement calculators and your SS, see what that tells you...even if you are 56 or 62.

Spam is all one could afford.
170K isn't much to last 20-30 years
written by John from Minneapolis, March 03, 2013 9:36
If you draw out 4% a year, as many financial counselors recommend, then your 170K (assuming it's liquid and not equity)will yield $6800 a year, or roughly an additional $550 a month. So then your senior has a monthly income of $1650 a month. Still not quite in the princely category. And of course, since that $170K is median, half the seniors will have less.

Even a senior with a paid-off house will likely have a monthly nut of $400-500 a month in property taxes (much more in blue states), $100-200 for insurance, 200 or so for heat and light. If they want cable TV and Internet, that's another $100 or so, maybe more. Plus you have to budget for both routine and unexpected repairs. Figure a couple hundred a month for that.

So even a modest, paid-off home can easily cost around $1,000 a month or more to maintain. That leaves our senior with $650 a month or so for food, medical bills, clothing, any small pleasures like a movie or a pet -- oh, and world cruises. Let's not even mention that many American seniors need a car because their public transportation options are quite limited.

Yep, it's a cushy life those seniors are living.
Net worth IS assets - liability
written by John Wright, March 03, 2013 9:41
written by JSeydl, March 03, 2013 4:33
Dean, I didn't link to that AARP report; PeonInChief did.

"Nevertheless, I see the point. (And John Wright has a good explanation.) I guess the confusion comes in with the word "net." Why do we keep saying that seniors have a median net worth of $170K when that figure just refers to assets? Most ppl consider net to mean assets minus liabilities"

Net worth IS assets minus liabilities, Dean made the simplifying assumption that the median elderly also owned the median valued house, which might not be completely accurate, as probably some of the elderly do not own homes and possibly the median elderly home is of higher/lower value than 170k.

But I suspect the numbers are in the ballpark, the median elderly net worth of 170k doesn't provide a great sense of wealth, independent of whether the 170K is in the house or financial assets.

For example, assume the elderly doesn't own a home and has 170K of financial assets, if they earn 12% (10% real after inflation) they will only have 17K to spend for housing and other expenses if they don't want to shrink their inflation adjusted net worth.

I believe Americans are "doing the math" and realizing that a couple of rich guys (Simpson-Bowles) don't understand (or want to understand) how important Medicare/SS is for everyone other than the well-off (such as Simpson-Bowles)

There just aren't a lot of financial reserves in the median American family at any age bracket.

No wonder Simpson-Bowles are having a difficult time getting traction as they are talking about gutting programs that are very important to a majority of Americans.
...
written by Jay, March 03, 2013 11:32
Stephan, not doing anything is risky too. Between inflation and losing out on historical returns from compounding. The problem is timing. Pensions invest and not all of them are not doing bad.
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written by David , March 03, 2013 11:46
Pew just crunched the data from the Feds Survey of Consumer Finances which oversamples the more affluent.
It seems to wildly over value privately held business very close to the fed manipulated stock market The data from estate taxes and the cenus gives a number Trillions lower
It does not have defeined benfit plans but every year there are fewer and fewer and fewer of those. Balanced out the 170K median may be a little high Even if liquid at current rates you get 1700 a year and a nursing home will wipe you out in 3 or 5 years if you find a bargain or live in a smaller town
Social Security should be Increased NOT decreased
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written by watermelonpunch, March 04, 2013 4:10
assuming they have made enough to put aside any savings at all


Assuming that of most people would be very stupid indeed.
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written by wkj, March 04, 2013 6:25
Slightly off topic, but median US household net worth (for all ages) is below that of 15 other OECD countries, a further confirmation of the poor financial health of the middle/working classes in the US.

http://middleclasspoliticaleconomist.blogspot.com/2012/07/us-trails-at-least-15-oecd-countries-in.html
Number of members in household
written by Mike B., March 04, 2013 7:46
I agree with Dean's point, but I think he's using the individual average Social Security check; for households with two retirees, they would get two checks. Still not a lot, but much better.

What Dean is doing with net worth and mortgages makes sense to me, but always confuses a lot of people. Maybe he should try explaining seniors' financial position in another way.
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written by kharris, March 04, 2013 10:24
"The bulk of people who are now turning age 65 do not have a defined benefit pension. (They did in 1984.) This means that the only income they have is their Social Security check,..."

No, that's not what it means. They can have income from other sources than a pension or Social Security. Your claim is simply not true.

If it were entirely necessary to make untrue claims to support your argument, I'd understand why you do it. I wouldn't like it, but I'd understand. You tend to say silly stuff like this even when you don't need to. It's baffling.
What about NPV of Social Security benefits?
written by Paul Broni, March 04, 2013 12:16
If you're looking at net worth, you might also ascribe a net present value to those Social Security benefits; all cash flows have an asset value.

To do otherwise is tantamount to saying that a leased car is not "debt."
(?) Why people are confused about paying mortgage (maybe)
written by Andrew Burday, March 04, 2013 12:18
Look, I may be the only person dumb enough not to have recognized this immediately, but it actually took me a couple of minutes and perhaps others are similarly confused. Two simple equations:

Total mortgage - homeowner equity = mortgage outstanding

Total assets - homeowner equity = all other assets

So if total mortgage = total assets, mortgage outstanding = all other assets. That's Dean's point. As he says, it doesn't matter if you have no equity but other assets equal to the value of your mortgage, or no mortgage but no other assets, or something in between. If the value of your mortgage, whatever that is, equals the value of your assets, whatever that is, then your assets other than equity equal the outstanding value of your mortgage. It's just arithmetic, not an assertion about how seniors are actually managing their assets. It does provide a helpful context, though.
It's garbage, but it matches your research...?
written by Paul Broni, March 04, 2013 12:20
It just made me chuckle a little that you felt Pew was "garbage," yet you were pleased that their findings matched yours. An odd thing to say, no?
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written by Eclectic Observer, March 04, 2013 2:07
Let's say you needed to generate an extra $20K of income yearly and you could get a 5% return on investment per year structured so there was no risk(an unlikely scenario I'd guess but bear with me). You'd need an investable amount of $400K (your home wouldn't really count as it couldn't be investable in most practical aspects). Assuming I've not screwed up the math-- that sort of means that under most scenarios lower rates of return and need for higher income to supplement social security to maintain living standards I'd hazard a guess that most folks are way short of what they need.
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written by Kat, March 04, 2013 2:08
It just made me chuckle a little that you felt Pew was "garbage," yet you were pleased that their findings matched yours. An odd thing to say, no?


"Garbage" was the description of the Pew report, not Pew.
Income from assets
written by Mike B., March 04, 2013 3:24
One was to determine how much income you could get from given assets is to find what a fixed annuity would cost. To get $20k per year for a 65-year-old man would cost around $300k, for a woman $325k. If you were older, it would cost less. The payments would be fixed, however, so over time would be eroded by inflation.

I plan to delay Social Security until I'm 70 (payments don't increase for delays after that), using savings to get me to 70. This way, I'll have the maximum secure, inflation-adjusted income until I die.
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written by inpenurytoo, March 04, 2013 4:56
Well, I am a Medicare/SocSec recipient and do have a mortgage -- along with high property taxes (northern NJ suboonia type high) and used up my savings and 401K during years after being "downsized." Tried to do one of those follow your dream things, failed at that. Got cancer. Had to keep obscenely high priced individual health insurance. Essentially ruined, except for SocSec and wee pension.

In that, I am better off than many. While I do have equity in my house, it's essentially "wealth" which I can't touch. I cannot afford higher monthly payments than I have now, so I can't take out a second mortgage or refi. Rentals around here cost more than my mortgage, but, of course, I wouldn't have the property taxes...decision time.

Dang, it's a bitch.
Going Long
written by JP, March 04, 2013 7:55
"I plan to delay Social Security until I'm 70" I accidentally fell into this 7%/year increase (as related to me by my accountant)because I had no idea I was eligible at 65. (I've mentioned before I can be obtuse!) Hopefully this will transfer over to survivor's benefits cuz' I wouldn't take that bet of reaching 70 with odds. My current bout with the flu most certainly influences my outlook.
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written by Mike M, March 05, 2013 7:35
Mr. Baker

"Does it make a difference whether they have $170k in a 401(k) and zero equity in their home or if they have zero savings of any type but they own their $170k home outright? For some reason folks seem to think this is a question of great importance, but I fail to see the significance."

401k - liquid. House, (especially in a poor market) - illiquid.

You gotta live somewhere.
Don't forget the "loans" to adult children
written by barb, March 05, 2013 11:07
No one has noted here how many seniors are holding up their adult sons and daughters by their collars in these murky waters. I've pretty much given my son whatever "wealth" may be left at my departure in order for him to keep his modest condo. Yes, partially his fault and partially
the war on working class families - still there goes my world trip. This is generic conversation among my peers, so I'm guessing it's common. Still - I'm lucky to be able to do it. I live in fear of my heater or roof going - these are real fears among seniors who are trapped in their homes as no one is buying. Also, in a sense we are the job creators in my suburb, not the corporations. Repairs never cease - never. Real estate taxes continue to go up - the "small cuts" to entitlements are hurtful to all generations and people who service homes. But the American people here haven't been served by these particular legislators for a long time - most depressin.




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written by PeonInChief, March 05, 2013 2:19
Financial planners are always telling people to delay taking SS benefits until they are 70. That's good advice if the following apply: you expect to live long past 70, you have a job you can still do at 70 and are assured of keeping it until then, or you have other resources you can rely on if you don't keep your job. My father, who died at 73, said that one of the dumbest things he did was not taking his SS benefits at 65. In his case, that was true.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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