August 6, 2013
Desperate to Retire? Don’t.
A new article in the Journal of Financial Planning lays out the unpleasant reality facing baby boomers who really want to retire but can’t afford it: working longer helps a lot.
In the article, David Blanchett, who heads the retirement research group for Morningstar’s money management unit in Chicago, calculated the impact of delaying one’s retirement date and found that it can sharply improve a retiree’s odds of financial success.
“There is not one silver bullet for success but if there were it would be delaying retirement,” he said in an interview.
The same case has been made for years by the Center for Retirement Research at Boston College, which supports this blog. Working beyond age 62, when individuals are first eligible to receive Social Security benefits, helps in three important ways:
- Monthly Social Security benefits increase by about 8 percent for every year that filing is delayed.
- Workers have more time to save through their 401(k)s at work.
- It reduces the number of years that individuals are actually in retirement.
Blanchett found, when he looked at an individual’s probability of retiring comfortably, that every one-year delay in your retirement date increases your probability of success by at least 10 percentage points.
Translating that, say you have a 45 percent chance of having sufficient retirement income from your Social Security, savings, and any pension you might have. Delaying one year would increase the probability of success to more than 55 percent – and to about 65 percent by delaying for two years.
All the evidence points in the same direction: working longer helps. It’s also one thing that an older worker who’s nervous about their retirement security can actually do something about.
That’s a good technique. Continue working while you can. It’s also best to discuss with your financial planner the creation of a tax-effective income stream as well as getting the most out of your government benefits when you’re nearing retirement age.
I strongly agree with the advice in this article because I believe that there is a great retiree crisis coming. Current retirees financial plans indicated they would be able to live comfortably the rest of their lives. Unfortunately, many of those plans were based on historic average annual returns on stocks, etc., that just happened to be the best stock returns in the history of the market. It’s unlikely their plans will average the expected 8-10% a year on a consistent basis – which is where the crisis occurs. Many may end up running out of money years sooner than they expected.
That doesn’t mean you have to work full-time for years longer. Consider a second career and/or working part-time so that you can delay pulling from your investments and delay starting Social Security.
As long as one is physically able to put off retirement, this is a good reminder of the reasons.
Personally, I do not plan to ever retire. My goal is to work less at something I enjoy. That is what I am doing now in my late 50’s.
If you have lost your job (I lost my company!), the only logical recourse is to retire off shore, as I have. A person can live comfortably, with full medical coverage (done directly with local hospitals – without insurance companies! Amazing!) for $2,000 USD per month in Thailand. In the community I am building, there are already 40,000 X-pats in Chiang Mai!
Always an easy story for these planners to suggest working forever. One thing never mentioned is the value of your time…to you, to your family, to your worthy causes. All of these areas suffer when you work. The younger you are, the more you are able to enjoy it. I found I was able to retire for a net cut of $700 a month to my income, and I still clear $1,000 a month with my pension alone. I expect this to work for me until I turn 62 and Social Security kicks in. I expect to never touch the money I have set aside in savings accounts, stocks, and IRAs unless I get some terminal disease, which would wipe me out whether I retire now or later. (I do have retiree medical insurance with my former government employer.) Plus I got paid for the 500+ hours of vacation time I had accrued and I will get 6 months salary in a couple of months for taking advantage of an early retirement incentive at work. We can all get fired or die any day…working longer puts this all at risk. Not saying retiring younger is always appropriate…but most planners need to include more factors than they do in their generic articles.
With more and more jobs going virtual, and with the Internet, there are tons of ways for retired people to make extra money if they need to. Of course the older generation isn’t that tech savvy, but the idea of working at one company for 30 years and retiring, is an old paradigm.
My good friend Adrian reminded me after reading this blog:
“If you delay retirement until death there is a 100% probability you will not run out of money.”
And of course, he’s right 🙂