Many boomers plan to stay in the workforce longer than previous generations, but how will we know when we are ready to take the leap into retirement?
According to a Wells Fargo survey last year of 1,000 adults with income less than $100,000, nearly one-third plan to work until they are 80 or older--up from 25% the prior year. Overall, 70% of respondents plan to work during retirement because they can’t afford a full retirement.
In addition to financial well being, new research shows people who delay retirement have less risk of developing Alzheimer's disease or other types of dementia. According to research out of France, for every year retirement is delayed, it decreases a person’s chances of developing Alzheimer's disease or other types of dementia by 3%.
Katie Libbe, vice president of Consumer Insights for Allianz Life Insurance Company of North America, offers the following tips to help boomers make the decision to jump into retirement or stay in the workforce
Boomer: How long should I continue working before considering retirement?
Libbe: The ideal start date for retirement should be different for every individual as we each have a unique perspective that dictates when we should make this major life decision. Part of this decision making is informed by your personal financial situation, but it’s also dependent on your priorities including your family, where you want to live, how much you need to work and how you choose to spend your disposable income.
That being said, it is never too early to start thinking about when you’d like to start retirement. There are a number of factors to consider before submitting your final two weeks’ notice. Most important is the status of your retirement portfolio and the effect your retirement age will have on the Social Security benefits you’re eligible to receive.
An effective strategy to help you determine your retirement readiness is the 4% rule, which is a general guideline for how much you can withdraw from your retirement portfolio every year, indexed to inflation, and not run out of money.
Boomer: What are some advantages of working longer before retirement?
Libbe: From a financial standpoint, the biggest advantage of working longer is the effect your retirement age has on your Social Security benefits. Although people are eligible to claim Social Security benefits starting at age 62, it doesn’t mean they should. People may receive 20-30% less in their benefits based on current Social Security Administration calculations if they start withdrawals before age 70. It’s a good idea to have a strategy for taking your Social Security benefits – including the possibility of working longer – that helps you meet your retirement income needs without sacrificing the potential level of your benefits unnecessarily.
Another significant advantage of working longer is the ability to maintain health care coverage through your employer. Finally, there are mental and physical benefits to working longer as well – Research from the Institute of Economic Affairs concluded that for men and women alike, there seems to be some long term health benefits of employment among older people.
Boomer: What is meant by "phased" retirement"?
Libbe: A phased retirement usually refers to one of two scenarios – either someone reduces the hours they work at their current job over time until they officially retire, or they leave their current job, but take part-time work until they decide to stop working completely.
Boomer: What are some of the benefits of a phased retirement?
Libbe: The main benefit of a phased retirement is the ability to delay taking Social Security payments because the longer you wait, generally the higher benefit you’re eligible to receive.
If the combination of a phased retirement and drawing from your retirement portfolio allows you enough income to cover your basic costs and live your desired lifestyle, this may be a viable option for stage one of your retirement. Ideally, some of your basic costs can be addressed by a guaranteed income source (pension, annuity, etc.). Once basic living expenses are taken care of, it’s much easier to incorporate a phased retirement strategy with the goal of delaying the start of Social Security payments so you can maximize your benefit.
Boomer: Should buyout offers be considered in retirement, and what are the advantages and disadvantages of these offers?
Libbe: It’s important to consider all retirement options carefully before making this major life decision. A buyout offer generally means an earlier retirement. If workers accept a buyout from an employer before age 62 (when they are first eligible to take Social Security benefits and/or before Medicare benefits begin at age 65), the individual must consider what income sources they might have prior to taking Social Security and how to pay for their health care costs prior to staring Medicare.
In addition, there are other benefits people receive from their employers that they must factor into the decision including their 401(k) plan and group life insurance. Even though a buyout from an employer can sound attractive on the surface, each person should examine closely the cost-benefits of such an offer. Preferably, this should be done with a financial professional who can help you understand the big picture, including how it affects your retirement income situation as well as any tax implications.