Turning 65 is no guarantee that you will be ready or willing to retire. A rapidly growing number of Americans are continuing to work beyond their 65th birthday. The proportion of people age 65 and older in the workforce grew to 16.1 percent by 2010, up from 12.1 percent in 1990, according to a recent Census Bureau report. And the percentage of people between ages 65 and 69 who are working grew 9 percentage points to 30.8 percent in 2010. These numbers are expected to further increase as baby boomers continue to reach retirement age. A recent Conference Board survey found that 62 percent of people ages 45 to 60 plan to delay retirement, up from 42 percent in 2010. Here's a look at some of the reasons people are increasingly working during the traditional retirement years:
Lingering effects of the recession. Financial assets certainly lost value during the financial crisis. But many people's assets have continued to decline because they withdrew funds from their financial accounts to get through that difficult period. Some 62 percent of people between ages 45 and 60 experienced at least a 20 percent decline in the value of their financial assets since the beginning of the crisis, compared with only 42 percent in 2010, according to the Conference Board survey. "Maybe they lost their job and they found a job making less than they used to," says Gad Levanon, director of macroeconomic research at the Conference Board. "Even though the economy is growing now, the damage that was done makes it very hard to recoup. And the older you are, it makes it more difficult to make up for it and more people are delaying retirement as a result."
Low interest rates. Between 2010 and 2012, U.S. interest rates declined significantly, reducing the yields on savings accounts, certificates of deposits, government bonds, and other savings vehicles. Low interest rates disproportionately affect people in or near retirement who often shift their money into more conservative investments. Retirees who were counting on interest from these accounts to help pay for living expenses may have to start dipping into their principal sooner than expected and could end up spending their savings too quickly.
Many retirees plan to withdraw an initial 4 percent of their savings each year, adjusted for inflation, over a 30-year retirement. But a recent Morningstar analysis found that this 4 percent rule may not hold in a low interest-rate environment. For example, Morningstar found that a retiree with a 20 percent equity allocation who wants to plan for a 30-year retirement with a 90 percent probability of success should plan on an initial withdrawal rate of 2.7 percent in today's investment environment of low yields, slower equity growth, and high asset-management fees. "I think the actual need is going to vary by investor, but for a conservative married couple who would have 70 percent plus of the portfolio in bonds, both age 65, a 3 percent or 3.5 percent initial withdrawal rate is likely a better starting point," says David Blanchett, a certified financial planner and head of retirement research at Morningstar Investment Management.
Shift to 401(k)s. Only about half of the workforce is offered retirement benefits through their employer, according to a recent Employee Benefit Research Institute analysis of Census Bureau data. And even when benefits are offered, 401(k)s are now the dominant type of retirement benefits. Many workers choose not to participate in their company 401(k) plan or contribute only small amounts. "Workers fortunate enough to have pension coverage increasingly have to assume the responsibility of saving for their retirement in 401(k) plans, hopefully getting a match, and bearing the volatility of 401(k) plans," says Sara Rix, a senior strategic policy advisor for the AARP Public Policy Institute. People in their 50s and 60s who haven't saved enough or invested well may need to delay retirement to give their savings additional time to accumulate.
Higher Social Security retirement age. The age workers can claim the full amount of Social Security benefits they have earned is no longer age 65 for everyone born after 1937. The full retirement age is now 66 for most baby boomers and is scheduled to further increase to 67 for people born in 1960 or later. Many people affected by the increase to age 66 delayed claiming Social Security benefits until this older age, likely to avoid having their monthly payments reduced for claiming early, according to a recent Congressional Budget Office report. The CBO projects that the labor force participation rate among people ages 65 to 69 will further increase from about 37 percent in 2012 to approximately 41 percent in 2022 among men, and from 28 percent to about 32 percent among women as a result of the older retirement age.
Longevity. Many workers are physically able to work beyond traditional retirement age due to continuing good health. "Health conditions are better managed than they were in the past and that makes it possible for workers, even with health limitations, to remain in the workplace," says Rix. There's also a growing realization that if you retire at age 65 and live until age 95, you will need to save enough to pay for 30 years of retirement. If you can shorten that period even by a few years, you will give yourself more time to save and have fewer years of retirement you need to finance.
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