Why You Must Plan to Retire Before You Turn 80

By Markets Fool.com

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Wells Fargo'slatest retirement survey included a fairly sobering result for anyone contemplating retirement. Half of the people in their 50s that the bank surveyed indicated they would need to work until at least age 80. That's an incredibly scary financial situation to find yourself in, even if you want to work into your 80s.

After all, the workforce participation rate starts dropping precipitously after people reach their mid- to late-50s -- and not all that leaving of the workforce is due to people voluntarily retiring. Between an increase in disability rates as people age, mandatory retirement ages, and the fact that unemployed periods tend to last longer for older workers,it's hard to stay working that long, even if you want to.

How the chips are stacked against older workers
Disability is a very real risk if you expect to work to age 80 or beyond. The chart below comes from the U.S. Census Bureau's 2010 survey of income and program participation. Every single age group has a higher disability rate than the younger group -- and the rates accelerate once people get past their mid-40s. Perhaps most disturbingly of all if you think you need to work until age 80, over half of the people in the age 75-79 group have some sort of disability.

If you think times are tough now, even if you have a job and relatively decent health, just imagine how tough it will be if you find yourself among the disabled before you're financiallyretirement ready. Even if your health holds up, are you confident your spouse's will, too? Do you really want to risk finding yourself in the position of having to choose between caring for your lifelong partner or putting food on your table?

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Plus, even if you want to keep working until you're 80, mandatory retirement ages generally start kicking in around age 70. Not every occupation or every employer has a mandatory retirement age, but those that do certainly make it harder on those trying to work until they're 80. Between health concerns and mandatory retirement ages, it's no wonder even those who want and are able to keep working as they age find it harder to get a replacement job if they lose theirs.

What can you do about it?
Perhaps the most important thing you can do is plan and save for your retirement as if you expect it to come well before you turn 80 -- and more like at a typical retirement age, or even a little before. If you want to work and are still able to work past then, the nest egg you've accumulated can continue to compound on your behalf. If health, job loss, or a change in your priorities keeps you from continuing to work, then you'll be incredibly glad you have the money when you need it.

If you're one of the people in your 50s or beyond who is contemplating working past 80, a few things change in the way retirement plans operate that affect you, and you'll want to know about them. Some of the changes help you, and others can trip you up if you're not careful.

What helps?
On the helpful front, once you reach age 50, you're eligible for "catch-up" contributions to your 401(k) and IRA accounts. The catch-up contribution lets you invest up to an extra $6,000 to your 401(k), or $1,000 to your IRA in 2015, above and beyond the limits allowed for younger people. Those limits allow you a total of $24,000 in your 401(k) and $6,500 in your IRA that you can sock away each year-- helping you reach that goal of being ready to retire.

Additionally, once you reach your full retirement age, you can start taking Social Security without being penalized for it -- even if you're still working.You'll still continue to get credit for your earned income during that time, but that check could help supplement your savings along the way. Of course, the trade-off is that your benefits increase if you delay past your full retirement age, up until age 70, so if you're not planning to invest that money, it's probably better to wait.

What should you watch out for?
Unfortunately, many of the rules on retirement accounts are geared toward people shifting from accumulations to distributions once they reach ages close to traditional retirement. You can't contribute to a Traditional IRA once you've reached age 70 and a half. Indeed, you're forced to take required minimum distributions once you reach that age, even if you are still working.

For your 401(k), you are typically not required to take minimum distributions as long as you're still working for the employer that sponsors the plan, even if you've reached that age 70 and a half. Once you do retire or leave that employer, though, those required distributions start for you. The exception to that rule is if you own 5% or more of the company that employs you -- if that's the case, you'll still have to start those required distributions at age 70 and a half.

Plan as though you'll retire on time -- then the choice is yours
If you want to and are able to work until a ripe old age, then by all means, do it. With a retirement plan that's well funded, working becomes your choice, and not your obligation. Working until you're age 80 or beyond because you want to is a far better place to find yourself than working until that age because that's the only way to keep food on your table and a roof over your head.

The article Why You Must Plan to Retire Before You Turn 80 originally appeared on Fool.com.

Chuck Saletta owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.