9/12/2012 9:43 PM ET|
Don't count on working longer
Workers may think delaying retirement is a solution to inadequate savings, but they may find themselves out of the workforce sooner than they'd planned.
Delaying retirement can be a powerful pick-me-up for a flagging 401k. 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 personal finance publications. And that chorus has grown louder since the financial crisis devastated many workers' 401k'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.
But there's a jarring disconnect between workers' expectations and retirement reality. Fully half of the retirees surveyed by the 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, a research director at the 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 disabilities were cited by more than half of retirees forced to retire earlier than planned, the 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 10 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 -- in this case, 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 pre-retiree with no retirement savings. If the 55-year-old earns $80,000, makes the maximum $22,500 annual 401k 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, he should count himself among the truly fortunate.
More from Kiplinger's Personal Finance magazine:
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Really... a 3% annual raise - I haven't had an annual raise or a cost of cost of living raise since 2006. I'm happy to just have a job. What world do these folks live in??
This article is out of touch with reality. Most of us earn less than $80,000 (even with an MBA) and after living expenses can't save much. And that is just necessary living expenses. Who gets raises anymore? Try working for the greedy nasty rich that treat their workers like dirt and pay them below market rate with no raises ever. Yes I can always get another job that pays better and treats workers better but I have been trying for over 2 years and when you are over 50 years old no one wants to hire you or even give you an interview.
I had intended to work past retirement age, but two months after I hit the magic number, my company retired me. It was absolutely perfect. Because they "laid me off" I got a generous severance package and was alowed ot draw unemployment despite being on social security.
Things couldn't have worked out better for me. My house is paid for, Both my wife and I draw soc sec and we are on medicare. This is the dream FDR envisioned back in the forties. Works for me.
Oh, yeah, we each have a nice IRA that we have managed to not touch so far.
If you are going to retire, pay the mortgage off first. Without a mortgage payment every month, you would be surprised at how little you can live on.
This is just another article that places blame on us for the Wallstreet corruption. I had my 401K's invested in mutual funds just like the financial planners insisted was the best place to put it. I took advantage of the employer matches and tried to save everything my budget would allow. Finally, I decided I was tired of watching my money go down the toilet and bought a fixed annuity with largest portion of my retirement savings. Thank God I did. At the age of 64 my unscrupulous employer decided to fire me for poor work performance. This was totally false but because I could not prove the falsehood of these allegations and the state of NC looked at my case and said "Oh look, this woman will be 65 in 2 months we won't need to pay her unemployment benefits because she will get social security. So now at age 66 I am at the end of my savings and finally after 15 months of being unemployed have found a job that is 40 hours a month. I am grateful for this job as it is more than I had. I have decided to try to become self employed and work from home. I will save my earnings under my mattress as the government has not had my back for sure. Did I mention I am a single woman who has supported herself for many years and paid all my bills and taxes on time. So much for honesty pays.
What average person makes 80K a year? More like $30K - $35K is reality.
Dont delay retirement at the first opportunity!!
Jump at it- grab it!
You dont know what God has in store for you- you may not get beyond that 62.
People who promote working longer probably never did a hard day's work. The reality is your body is starting to wear out at that age and it becomes harder to do physical labor. It sounds good but is difficult for most.
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