Easy Fix for Retirement Problems: Work Longer

Let’s get the bad news out of the way first: 51% of households below the age of 65 are at risk of not having enough income to enjoy the lifestyle they’ve been looking forward to in retirement. In fact, according to Tony Webb, research economist at the Center for Retirement Research (CRR) at Boston College, other than the value of their home, about half the population has “basically nothing” saved for retirement.

Scary.

Indeed, this year’s annual Retirement Confidence Survey produced by the Employee Benefit Research Institute found that 30% of today’s workers have $1,000 or less in savings and/or investments, and 60% have less than $25,000 in their savings accounts. However these numbers include workers of all ages, ranging from the very youngest-whom you would expect to have little in savings- to those on the cusp of retirement.

Unfortunately, a significant portion of older workers have next to no savings or investments. Harris Interactive reported last year that, shockingly, a significant portion of nearing or already in retirement have no nest egg set aside at all. “Generationally, one in four (25%) baby boomers (aged 46-64) have no retirement savings, with 22% of Matures (aged 65 and over) stating the same.” (1)

Here’s the good news: There’s a simple fix. Work a few years longer. (I didn't say you were going to like the solution)

How much longer? By expanding upon the National Retirement Risk Index, analysts at CRR, including Webb, determined that 85% of us would have the financial resources needed to maintain the standard of living were enjoyed prior to retiring  if we worked until age 70. (Gasp.)

“But I hate my job! There’s no way I want to keep working for that company for another ___ years!”

Deeeep breath. You don’t have to continue to slog away in the job you currently have. (Although if you enjoy it, that’s your best option.) All you have to do is work someplace where you can earn enough money to cover your daily living expenses.

70 = the New “65”

The key to this strategy is two-fold: Once you reach age 62, a) resist the temptation to file for Social Security benefits, and b) don’t take any withdrawals from whatever personal assets you have, such as a 401(k), IRA, etc.

If you absolutely can’t stand or lose your existing job, find another one; all it has to do is cover your bills.

You can afford to take a somewhat lower-paying job for several reasons. First of all, the analysis assumes that your existing savings will grow at an annualized rate of 4.6%. It also assumes you will stop making any more contributions to a work-related retirement plan.  If your “bridge” job is closer to home, your commuting expenses might decline. You can probably also figure you’ll spend less on work clothes.

Once you reach age 70, that’s when you stop working completely and begin receiving Social Security benefits. You also start tapping your savings at a rate of about 4% per year.

Super-Charge Your Retirement

If you’re a baby boomer who has been planning to retire at your full retirement (currently 66), waiting until 70 is only four years longer. And during those four years, “magic” can occur.

In addition to giving your investments more time to grow, you get a big boost in Social Security income, which increases by 8% for each year past your full retirement age that you postpone the start of benefits.(2) For instance, if your monthly check at age 66 were $1,000, at age 67 it would be $1,080. Delay until 68 and it would be $1,160. Start benefits at age 70 and it jumps to $1,320/month--a 32% increase for waiting four years. (3)

The net result is that for anyone whose full retirement age is 66, claiming Social Security at age 70 versus claiming “early,” i.e. age 62, increases your monthly check by at least 76%. This advantage continues to grow because the annual Cost of Living Adjustment (COLA) from Social Security is applied to a larger dollar amount.

According to Webb, the guaranteed increase in your Social Security benefit for each year past full retirement age is what’s driving the decrease in the percent of people at risk. Check out the graph below, it illustrates how “retirement readiness” steadily increases from age 62 to 70.

Putting Your Home on the Table

The one problem I have with this analysis is that it includes your personal residence in with all the other types of assets you own- including savings accounts, IRAs, employer-sponsored retirement accounts, and investments. It assumes that you tap into the equity in your home to help generate the retirement income you need- either by selling it or through a reverse mortgage. Webb admits, “In reality, almost nobody does.”

Nonetheless, if you’re like most, your home is your single largest financial resource and it has to be taken into account. If you intend to “retire in place” and not downsize, you’ll need to adjust your retirement budget accordingly.

For Most, But Not All

Obviously, the “work a few years longer” strategy is only feasible if you are healthy enough to continue working and can find employment. Webb also concedes that the concept is probably unappealing to someone who has spent their life in a field that is physically demanding, such as coal mining. “I would not want to go into a bar in West Virginia and say ‘Don’t worry.  Work til you’re 70 and you’ll be fine.’”

Rather, he says, the advice is aimed at “the majority of the workforce who want to retire at 62 because they’re fed up and want to play golf.”  Although you might have to work a few years longer than your parents did, you’re probably going to live a few years longer, too. Which means that extra income will come in mighty handy.

Find the full report from the Center for Retirement Research here.

“I was surprised at how effective working longer was,” admits Webb.  “Even if they work only a few years longer, it will enable the great majority will be OK” in terms of being able to afford retirement.

1. Access to a retirement plan such as a 401(k) at work was a major factor.  On average, those who contribute to an employer-sponsored retirement plan have saved considerably more- at least $50,000.

2. The 8% increase per year is not compounded.  Instead, the amount is determined based upon the value of your benefit at full retirement age.  Each year you delay claiming, your monthly check goes up by this same amount.

3. It actually works out to be even higher than this because each year between age 66 and 70, your benefit is also increased by any annual Cost of Living Adjustment (COLA) Social Security offers.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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