Your Financial Plan: Transition & Retirement Planning

Best Remedy for Retirement Security: Don’t Retire

If you’re worried about your financial security in retirement, here's one solution: Work a little longer.

Most people say they don’t plan to retire until they turn 65. But that’s not what we’re actually doing. More than half of Americans actually retire at age 62—even though it’s not usually the best decision. Working even just a few additional years can pay a big bonus in long-range retirement security.

That’s the prescription offered by two of the nation’s top retirement experts, Alicia Munnell and Steven Sass. Munnell is director of the Center for Retirement Research at Boston College; Sass is the Center’s associate director.

“Working Longer: The Solution to the Retirement Income Challenge” (Brookings Institution Press, 2008) looks at the governmental policies, business practices and individual decisions that go into the decision to retire. The authors conclude that we need to find ways to encourage people to keep working longer.

“We have a contracting retirement income system, and increases in life expectancy,” says Munnell. “That means people will need to stay in the labor force longer, because it buys you a lot. That doesn’t mean you need to work until you’re 90—maybe just a few more years.”

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The Normal Retirement Age (NRA) as defined by Social Security is 66 or 67 for most people. But in 2005, 55 percent of men -and 50 percent of women filed for Social Security at age 62, according to Social Security Administration data. Even more striking, just 10 percent of men and women waited until age 66 to file for their benefits.

Working to your NRA boosts your income in retirement by a third, Munnell says. That’s because you don’t incur the penalties Social Security imposes when you take benefits early. You’ll also be contributing more to your 401(k) plan, and you won’t need to support yourself quite as long once you do start taking benefits and drawing down savings.

“The usual pattern has been to work 40 years and retire for 20,” Munnell says. “If you push back your retirement age by four years, now it’s work 44 years and retire for 16, so the ratio is three-to-one. That just gives you a much better chance to have a really secure retirement.”

The U.S. General Accountability Office (GAO) has done a “what-if” calculation to illustrate how working longer can relieve the pressure to save for retirement. GAO calculates that a 35-year-old man who retires at age 67 (the Social Security Normal Retirement Age) would only have to save 6 percent of his salary annually in order to replace 75 percent of income in retirement. If that same person retired at age 62, he’d have to save 11 percent of his pay each year.

If working longer makes such economic sense, why aren’t more people doing it? Munnell believes that Americans take the cue to retire at 62 from signals sent by employers, co-workers, and even friends and family. “It’s a cultural expectation,” she says. “People just think they should retire, and it becomes infectious. We see our neighbors or our spouses doing it, so we think we should, too.”

Munnell also argues that the Social Security eligibility at age 62 creates an “easy out” for employees who don’t find satisfaction in their work.

Changing this scenario won’t be easy. The authors’ research suggests that employers tend not to invest in training or promoting for older workers, because they suspect—correctly—that these employees won’t be sticking around for long. They also found employers “lukewarm” to the concept of hiring older people, believing that they are too expensive to compensate and don’t keep their skills up to date.

Munnell also isn’t a fan of phased retirement or part-time arrangements. She notes that many employers shy away from these arrangements due to worries about health insurance costs, pension rules and which workers should be eligible for part-time work.

Policy changes could improve the outlook. Munnell advocates lifting the earliest age for Social Security eligibility, with exceptions for people who can’t work due to disability. She’d also like to make Medicare the primary payer for all workers over age 65, which would give employers relief on health insurance costs.

Munnell admits that working longer is not a solution that will work for low-income Americans. These retirees typically don’t have pension plans or significant retirement savings, and will be far more dependent on Social Security. Still, the odds for working longer are stacked against lower-income workers since they tend to do more physical labor and may not be in good enough health to continue working.

But if it’s an option for you, think about staying on the job just a little longer.

© 2008 Tribune Media Services Inc.