The Case for Retiring Later

by Carla Fried | Mar 9, 2009 | Comments

Key Stats

• Name: 401 (k)
• What it is: An employer-sponsored retirement plan that lets you invest pre-tax dollars, which can grow tax-free until withdrawal.
• Who has one: 66 million Americans
• Who's not investing the annual max: 60 percent
• Average 2008 return: −27 percent
• Retirement savings: Only 23 percent of people over 55 have more than $250,000.
• Sources: Fidelity, Employment Benefit Research Institute, Financial Engines

Let’s get real. In the wake of the recent bear market mauling and vaporized home equity, the cure for what ails your retirement plan isn’t going to come from refining your asset allocation strategy or even a stock market turnaround. The S&P 500 needs a 100 percent bungee jump to get back to its October 2007 peak. You’d have to be a perma bull on meth (or a CNBC anchor) to think that’s in the cards any time soon. And even though saving is suddenly considered a national virtue, at this point you’d probably need to sock away 25 percent or more of your pretax income to give your portfolio a serious turbo-charge.

So you’re screwed, right?

Nope.

Like most things these days, what you need most is a willingness to switch to Plan B. That’s what the big minds paid to think about retirement — think tankers, academics, financial advisers — have done. Now that it’s evident that Plan A — to save up, rely on the long-term prospects of stocks, and devoutly diversify — won’t deliver you to the retirement promised land, the gurus agree we’re all going to have to get on board with the simple new rule at the center of Retirement Planning 2.0:

You can still retire comfortably...as long as you agree to retire later.

The Triple Dividend

Richard Johnson, a senior fellow at the Urban Institute, cites the “triple dividend” payoff of a later retirement strategy. You have more time to earn more. You boost the value of your Social Security benefits and your retirement accounts. And, perhaps most important, you reduce the number of years you’ll be spending in retirement, which means your retirement nest egg needn’t support you as long.

Before you start grumbling “it’s just not fair” that you have to work longer, rest assured that the number crunchers figure that you’re likely to need to work just an extra four years or so — retiring at 66 rather than 62 — to be in good financial shape.

Not enough of a silver lining for you? Then try some perspective. The median retirement age in 1950 was 67 for men and 68 for women. Today it’s about 62 for both. So the “new” strategy is merely getting us back toward the old norm. And even if you retire at 67, you’ll still probably end up living longer than your grandfather who retired in 1950 at age 67.

Yes, the dreams of early retirement were fun. But they were just that: dreams. The twin market anomalies of the late ’90s stock bubble and the more recent real estate bubble messed with your expectations. Now it’s back to reality, and that requires some rethinking. “It’s time to recognize we need to redefine work and retirement for the 21st century,” says the Urban Institute’s Johnson.

How It Pays to Delay

No one is suggesting you’re destined to be a Wal-Mart greeter until you’re 85. Check out the mood-enhancing chart below ginned up by mutual fund firm T. Rowe Price that shows the power of playing the delay game. If you stay on the job until age 66, your retirement income (based on a slew of assumptions detailed below*) will be nearly 20 percent higher than if you were to check out of the workforce at age 62.

Now if you actually save some of that post-62 salary, the delay game becomes even more lucrative. Manage to save 15 percent of your pretax income and your retirement income will be about 35 percent higher. Keep working until 68 and your retirement income will be 50 percent higher. Feeling better?

The driver of that nice boost in income is the aforementioned triple dividend — especially the payoff for delaying when you opt to start drawing Social Security. About 70 percent of folks choose to start receiving an early Social Security payment between age 62 and their normal (full) retirement age, which is somewhere between 65 and 67, depending on the year they were born. (Anyone born since 1960 has a normal retirement age of 67.) Problem is, the early benefit is less than you would get if you waited a bit. Every year you delay drawing Social Security between age 62 and 70 increases your eventual payout by about 8 percent a year. Try getting that steady payout in the markets!

Of course, there’s an actuarial gambit at play here: if you die after 62 but before you start collecting, you’ve forgone all the benefits you could have collected beginning at age 62 (though your surviving spouse could draw a higher benefit than he or she would if you had started at 62). But that’s the wrong way to look at it. Social Security is an insurance policy against living too long for your money — and waiting for that benefit buys you the most insurance. Live to 78 and you’ll be ahead of what you would have collected if you had opted for the reduced benefit at age 62.

Getting Jobbed

There’s one big honking problem. Just because you want to work longer — just because you need to work longer — doesn’t mean it’s going to be easy to do.

A 2007 survey by the Vanguard Center for Retirement Research found that among early retirees with a median retirement age of 55, 23 percent were pushed to the sidelines by a health issue or disability, while another 14 percent said a layoff knocked them out of the workforce. Sometimes life gets in the way of work.

Nor can you count on gracefully winding down during the later phases of your career with a longtime employer. A study found that in 2004 fewer than a quarter of men between the ages of 58 and 62 and working full time were still with their age-50 employer; that’s down from 45 percent in 1983. Employers seem ambivalent at best about keeping older workers around.

Age discrimination? Sure, that’s in play, but it’s not the only factor.

Older workers are often low-hanging fruit when the number crunchers start doing a cost-benefit analysis for the board. Productivity tends to level off (at best) when you hit your mid-50s, right around the time that your cost to employers — salary plus health and other benefits — tends to rise. Thomas Mackell Jr., former chairman of the board of directors for the Federal Reserve Bank of Richmond, and author of When the Good Pensions Go Away, says intergenerational issues are also a concern of business owners. “Even if you value your older workers, keeping them on for a long time is going to frustrate the younger employees who can’t move up the ladder.”

Coping with Lower Income

Regardless of whether a post-50 job switch is self-motivated or foisted upon you by a reorg, the financial impact is clear. “When older workers switch jobs, it almost always results in lower income,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author with Steven Sass of Working Longer: The Solution to the Retirement Income Challenge. If your current financial plan is predicated on continuing to rake in big bucks into your late 50s and early 60s, you could be in for a rude awakening. And if you do find yourself job hunting in your 50s and 60s, don’t expect HR to roll out the red carpet.

There’s also a new disconnect brewing between older workers and employers. Baby boomers are quick to say they want to delay retirement, but they are equally clear that they want to do so on their own terms by working fewer hours or having flex schedules that allow them to take chunks of time off. Employers have been less than enthusiastic about offering formal “phased retirement” options. In-demand industries facing a labor crunch, such as healthcare, may indeed warm up to retaining and courting older workers. Then again, immigration and global outsourcing could also be a solution to labor shortages as the boomer workforce cedes ground to the smaller Gen X cohort. “The whole notion of having the option to work longer, and do it on your own terms, was at best a luxury when the economy was growing,” says economist Teresa Ghilarducci. “Workers don’t decide that. Employers do.”

The Self-Help Workout

As the CRR’s Munnell sums it up, adapting to the new retirement realities is going to be a “messy” proposition. Making it all work is going to come down in part to your personal effort. Given the current economic environment, it’s unlikely that big business or Washington policy makers have the bandwidth (or budget) to nudge along the delayed-retirement agenda. Don’t count on business adopting a friendlier attitude toward retaining older workers, or Washington tackling the hot potato issue of nudging the early-benefit age for Social Security from its current 62 to 64 in an effort to encourage folks to work longer. Maybe employers and policy makers will catch up down the line, but right now you need to start strategizing how your 40- and 50-year-old self is going to remain eminently employable at age 65.

Thinking about the possibility of getting downsized is a good place to start. “We are all expendable at any time. That’s just a fact,” says Deborah Russell, director of workplace issues at the AARP. That means making sure you have all the skills recruiters will be scanning for; if you’re rusty, it’s easy to find someone (often younger) who isn’t. “Whether your current employer subsidizes it or not, it’s incumbent on you to get the training to stay relevant,” says Russell.

Physical training will help matters, too. Plenty of people who want to work into their 60s and 70s are unable to do so for health reasons. So getting in shape and watching your diet isn’t just health advice; it’s essential financial planning.

As you head into your 50s, you’ll also need to make a concerted effort to play well with others. “You may not speak the same language as your younger colleagues, but it’s up to you to figure out how to bridge those communication gaps,” says Sanjiv Kumar, managing director of Buck Consultants’ human resource practice.

CRR’s Munnell says that going with the flow is one of the highest hurdles for older workers who need to keep working. “To the extent work is distasteful as you age, there is this tendency to say, ‘I’m out of there,’ and basically quit for what, in retrospect, look like frivolous reasons,” says the 66-year-old full-time academic. “Maybe you can censor yourself a bit and not make decisions that don’t really work for you [in terms of long-term retirement security]. We all just suck it up when we are young. Now we’re just going to have to suck it up longer.”(Click here for more of Munnell’s retirement insights.)

Finally, one of the biggest assists you can give your future older self is to adjust your spending today so you will have the freedom later to take a less stressful job in the later stages of your career, either part time or full time. That means stoking the retirement fund sooner rather than later, and not burdening yourself with a huge mortgage or home equity line of credit as you head into your 50s. “The good news is that when people do move to a less stressful job in their 50s they are happier and tend to stay on longer,” says Munnell. And that’s ultimately the ticket to a retirement free of financial stress.

*The study assumes $100,000 in annual salary, $500,000 in tax-deferred savings at age 62, 3 percent inflation, an asset allocation of 40 percent stocks, 40 percent bonds, and 20 percent short-term bonds, and a 90 percent probability that there will be at least $1 remaining in the portfolio at age 95.