For most of your working life, you have looked forward to the day when you can quit your job and start enjoying retirement. But in the face of longer life expectancies, uncertain Social Security benefits, declining pension benefits, unknown inflation rates, volatile markets, and low retirement savings, can you really afford to retire at a relatively young age and spend decades supporting yourself without a job?
The average life expectancy of a 65-year-old man is 81 and of a 65-year-old woman is 84. A 65-year-old couple has a 25% chance that one of them will live to 95. That’s a long time to support yourself without a job. More and more people are coming to the conclusion that either retiring later or continuing to work during retirement is necessary to ensure that they remain financially comfortable for the rest of their lives.
There are also some nonfinancial benefits for continuing to work:
• Work keeps you healthier and mentally sharp. Of those who had completely retired, 11% experienced a decline in mental health, 8% had an increase in illness, and 23% had increased difficulty in performing daily activities over a six-year period (Source: National Bureau of Economic Research, 2006).
• Work enables you to maintain social contact with people outside your immediate family. When individuals who had been retired for a year or two were asked what the hardest thing to deal with in retirement was, the number two answer, just behind loss of income, was loss of social connections at work (Source: The New Retirement Mindscape, 2006).
Working does not necessarily mean that you have to stay with your current employer. Rather, many individuals are taking on completely different jobs, which can allow them to try something totally different, provide more free time by working less, or ensure less stress.
Besides the nonfinancial reasons for working, there are several financial reasons that make this an important retirement strategy:
• You have more time to save. Each additional year you work is an additional year you can continue to save for retirement. Those age 50 and over have additional means for saving, with annual catch-up contributions of $1,000 for Individual Retirement Accounts (IRAs) and $5,000 for 401(k) plans in 2007.
• You shorten your retirement. The longer you work, the less time you will spend in retirement, which means you need less money to fund that retirement.
• You can delay Social Security benefits. Every additional year you wait to take Social Security benefits before the age of 70 ½ will increase your monthly benefit.
• You keep health insurance benefits. One of the most significant costs in retirement is health care, and you can delay the cost by working at a job that provides this benefit.
Some companies are helping employees with retirement issues by allowing phased retirement, where hours are gradually reduced until full retirement. One possible advantage of staying with your current employer is that the pay may be better than if you started over in another profession. If your employer offers a phased retirement program, find out these details before signing up:
• How will phased retirement affect your pension? Many pension benefits are calculated based on your earnings in the last few years of your working career. If you do not want to take pension benefits yet, make sure your pension will be calculated using earnings while you worked full-time. You may also be able to draw a pension and work part-time. The Pension Protection Act of 2006 allows workers age 62 and older to draw a pension and work part-time.
• What will happen to your salary with reduced hours? Will you receive a pro-rata share of your pay, or will a different pay scale be used? Will you be entitled to salary increases in the future? Make sure you agree on how you will be paid before going to part-time status - and get it in writing.
• Will you be eligible for health insurance benefits? Find out the company’s policy about health insurance benefits for part-time employees. This will be especially important if you go to part-time status before age 65, since you won’t be eligible for Medicare.
• What other details should you know about? Make sure there is a mutual understanding about your hours. Can you take time off for travel? Is this a permanent or short-term arrangement? If you do not like part-time work, can you go back to your full-time job?
If your employer does not offer a phased retirement program or you want to try something new, investigate your options before quitting your job. Consider a variety of factors:
• How are you planning on spending your retirement? If you plan to travel a lot, how will work fit into that schedule? If you plan to split your time between two homes in two locations, how will you be able to work?
• What interests you? Would you be happier pursuing a job that takes advantage of skills from your current job, or would you like to try something totally different? Do you need to obtain additional skills or go back to school?
• Do you want to work in an office, by yourself, or at home?
• Do you want a job with significant responsibility, or are you trying to reduce the stress in your life?
• Are you passionate about an interest or hobby that you may be able to turn into a business? Do you have an interest in starting your own business? If so, do you have the financial resources, without risking funds for your retirement?
• Is there a cause that is important to you? Is it time to move to the nonprofit sector, finding an opportunity that matters to you at a personal level?
Retirement is in the midst of being redefined once again. The last generation was able to retire to a life of total leisure due to the generosity of company pension benefits and Social Security. But longer life expectancies and less generous benefits mean that it is time to redefine retirement. What many are seeking is not so much total leisure as more leisure or a more meaningful life. Many are finding that those goals can be accomplished while still working, and that those additional working years can provide more financial security.