Don't Count on Working Longer
Delaying retirement can be a powerful pick-me-up for a flagging 401(k). But banking on additional working years to revive retirement savings is also risky business.
If you pay any attention to retirement planning, the "work longer" mantra probably sounds familiar. It's a common refrain among financial planners, mutual fund companies and, yes, this publisher and other personal-finance publications. The chorus has only grown louder since the financial crisis devastated many workers' 401(k)s.
The rationale is simple: By working longer, you get more years of tax-deferred growth in your retirement accounts, and those assets must sustain you for fewer years in retirement. What's more, those who stay on the job can maximize their Social Security checks by waiting until age 70 to claim benefits.
More than one out of four workers now plan to retire at age 70 or later, according to the Employee Benefit Research Institute. That's up from 16% in the pre-crisis days of 2007. Just 8% of workers expect to retire before age 60, down from 17% in 2007.
Retirement reality. But there's a jarring disconnect between workers' expectations and retirement reality. Fully half of the retirees surveyed by EBRI this year said they left the workforce earlier than planned, and just 8% of them said that positive factors -- such as the ability to afford early retirement -- prompted the move. For the vast majority of early retirees, negative circumstances, such as company downsizing, played a role.
Clearly, workers relying on delayed retirement are rolling the dice. Yet, says Jack VanDerhei, research director at EBRI, "most people discount the future so much that they're willing to take that gamble."
The people most likely to plan on working longer to boost their retirement security may actually have the least ability to postpone their retirement. People in poor health are more likely than those in good health to have pushed back their expected retirement date in recent years, according to consulting firm Towers Watson. Yet health problems or disability were cited by more than half of retirees forced to retire earlier than planned, EBRI found.
Today's tough job market compounds the uncertainty of postponing retirement. Last year, the median length of unemployment for people 55 and older was 35 weeks, up from ten weeks before the recession, according to a recent report by the Government Accountability Office.
A sure thing. As behavioral-finance experts are quick to point out, we all have an inner procrastinator who loves to put off till tomorrow what we should do today -- namely, boost our retirement savings. But saving more today is a sure thing, and extra years in the workforce are anything but. "If you know you're not on track, you should start saving more today because that's by far the less risky alternative," VanDerhei says.
Don't assume it's too late for saving. Older workers who maximize their savings can make up significant ground. Financial-services firms don't always stress this point. T. Rowe Price has lately promoted the concept of "practice retirement," encouraging older clients to continue working but scale back retirement-account contributions and free up time and money to test-drive retirement.
But T. Rowe Price also acknowledges that savers can make up lost ground quickly. It provides an example of a 55-year-old preretiree with no retirement savings. If the 55-year-old earns $80,000, makes the maximum $22,500 annual 401(k) contribution (including a $5,500 catch-up contribution for those 50 and older), gets a 3% employer match and a 3% annual raise, and earns a 6% return, his balance could top $400,000 by age 65. If he's forced to retire at that point, he's still in better shape than most Americans. And if he can continue working, then he should count himself among the truly fortunate.
Eleanor Laise is associate editor for Kiplinger's Retirement Report. To subscribe to Retirement Report, click here.