Delayed retirement is becoming the new normal for more Americans. In an April 2017 Gallup poll, 39 percent of Americans said they expected to retire after age 65, up from 35 percent a decade ago. Sixty-three percent of those polled said they planned to work part-time in retirement, while 11 percent planned to continue working full-time.
For some, the decision to delay retirement is a matter of personal preference. Thirty-four percent of workers polled said they wanted to work at least part-time in retirement. For others, however, finances dictate that they continue working.
According to the Economic Policy Institute, the typical working household has $95,766 saved for retirement. The average savings for workers ages 55 to 61 is just $163,577, well short of the $738,400 Merrill Lynch pegs as the average cost of retirement.
Postponing retirement may allow you to delay tapping into your savings or continue adding to your investments, but it's not foolproof. "Working later can be rewarding when it's possible and by choice," says Joe Ready, director of Wells Fargo Institutional Retirement and Trust in Charlotte, North Carolina. "However, what people plan and what life presents can sometimes be very different."
Before staking your future on a delayed retirement, consider how unexpected curveballs could thwart those plans.
When to retire may not be up to you. Your health or your employer could push you out of the workforce sooner than expected. In a 2015 Wells Fargo Retirement Study, for instance, 37 percent of retirees who retired early were forced to because of health reasons while 21 percent did so because of an employer's decision.
Tamra Stern, partner and director of wealth management at Main Street Research in Sausalito, California, says workers often don't plan for these scenarios. Instead of actively stepping up contributions to their retirement accounts, many people assume they'll be able to rely on their current paycheck past retirement age.
There are two problems with this way of thinking, she says. "Though they may be healthy now, illness can strike at any time." Additionally, the continued stress of working longer could also take a physical toll, diminishing their ability to stay on the job.
At the same time, Stern says older workers are much more susceptible to downsizing. If an employer is nudging you toward early retirement, you may have to shift your plan to account for a new job that pays less than what you make now. If you're delaying retirement because of a savings shortfall, don't assume you're immune to these possibilities.
Working longer can skew your investment judgment. Standard retirement investing advice calls for taking more risk while you're younger and moving into more conservative investments as retirement nears.
But working longer could give you a false sense of security with investing. "Someone who's delaying retirement might incorrectly assume they can take more risk with their portfolio," says Mark Rose, an investment advisor representative with Investment Strategies in Oklahoma City. "They may think they have another five or six years in the workforce, but things can change very quickly, and they may hit retirement sooner than expected." If you've taken too much risk with your asset allocation, that can put you in a tough spot.
Jake Serfas, lead financial strategist at O'Dell, Winkfield, Roseman and Shipp in the District of Columbia, says investors who plan on working should keep their end goal in sight, even if it's several years away. "Investing heavily in stocks may not be the best choice, especially if you're working because you need to save money so you can afford to retire." If a major correction hits, you may be back to square one with your investments. You would be better off building an income portfolio for when you retire, rather than chasing performance or higher returns.
Asset allocation should reflect your target retirement age, Ready says. Modeling the income scenarios for different retirement ages can give you a sense of how your cash flow might look if you have to retire earlier than planned. From there, you can adjust your investment strategy accordingly, but remember to balance the need for higher returns against the security of knowing your money will be there if and when you need it.
There's also Social Security to consider. Social Security benefits are likely to be a significant part of your retirement picture if you've saved less than your goal, and when you begin claiming benefits affects how much money you will receive each month.
By working longer, you could put Social Security on the back burner temporarily. That's to your advantage if it means netting a larger monthly payment later on. For each year you delay benefits past your normal retirement age, they increase 8 percent until you turn 70.
If you must take Social Security early, perhaps because you're unable to continue working, the picture looks far different. In that case, your benefits would be reduced up to 25 percent, depending on when you begin receiving them.
A third option is to claim benefits early while continuing to work, but this has its own ramifications. "If you're still working before you hit full retirement age and file for Social Security benefits, you'll be met with an earnings threshold," Rose says. For 2018, that threshold is $17,040, and for every $2 you earn over that limit, your benefits are reduced $1. In the year you reach full retirement age, the threshold increases to $45,360, and benefits are reduced $1 for every $3 you earn over that limit.
Any benefits that are withheld would be added back to your monthly payments when you hit full retirement age, but in the meantime, you would have to do without that money. If you're delaying retirement, the best option may be to also delay Social Security if you can afford to do so.
The market doesn't always match your timeline. Even the best-laid retirement plans can fall victim to a sudden sharp downturn in employment or the stock market. The 2008 financial crisis, for instance, took investors by surprise, leaving many to put off retiring for longer than they'd planned while others who lost their jobs were forced to retire sooner than they wanted. "Safeguards should always be established in the event of unforeseen circumstances," says Joe Heider, president of Cirrus Wealth Management in Cleveland.
So plan for the possibility of not being able to retire when you want by maxing out your contributions to retirement or taxable accounts while you're still in your prime earning years. "Planning for the worst and hoping for the best still works," Heider says.
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