Planning to Work Into Retirement

In a world where employees can’t rely on long-term relationships with their employers, most of which no longer offer relatively safe retirement protection through pensions, planning for retirement, at least for the younger demographic in today’s workforce, is substandard. People do start thinking about their future as time goes by, but often, the appropriate planning and saving doesn’t begin until later than one would later hope in hindsight.

There are numerous obstacles to getting to one’s retirement number — a measure of net worth that one could live on, invested properly, without needing to supplement with additional work. The future of Social Security is unclear. Pensions are mostly extinct as I mentioned above. Prices for health care are rising faster than inflation. A downturn in the stock market at an inopportune time could devastate your income potential from investments.

A common solution for increasing income in retirement is to delay the beginning of that phase of one’s life. Working in retirement on a part-time or consulting basis can reduce the stress brought on by a full-time job while supplementing income from investments with a check. One of my family members, a partner in a consulting firm, is planning to reduce his hours rather than retiring as soon as he is eligible, and I’ve heard similar stories, even from people who are not nearing retirement just yet. The math shows that income in retirement can be greatly increased by delaying the end of work, and as younger workers begin to realize this, the idea working longer becomes the best-looking option.

When we begin career planning at this level, there’s a tendency to assume we have complete control over our decisions. To a major extent, we do. Every day, even without realizing it, we make hundreds of decisions. We choose to wake up on time. We choose to eat a healthy breakfast. We choose to go to the office. We choose to do our work to the best of our abilities. Every action is a choice where we weigh the consequences. Getting fired is one consequence of not going to the office consistently when expected to do so or not working at the level of one’s potential.

As you get older, though, some of the situations become a little more unpredictable and a little more influenced by external events.

Even if you plan on working into your retirement in order to increase your income after ceasing your nine-to-five job, you may not get that choice. Age discrimination laws aside, if your salary is an expense your company cannot handle when a younger worker in your place could save the company money, your job is in danger regardless of your performance. One could argue you have the choice to better represent your value to the company to avoid this situation. One could argue that a worker with longevity could have offered to take a salary cut to be more competitive with younger, less-experienced workers in a tough job market. But if we’re being honest with ourselves, we must recognize there are situations where there is nothing a person could have done better other than being younger.

Corporate decisions aren’t the only drivers for early retirement. Health issues often become more of a problem as people age, and while one could argue that staying healthy is also a personal choice, health issues are often well beyond someone’s control. A spouse or family member could become sick if not yourself, and either your own health problems or those of a loved one can pull your focus away from your job.

As a result, plans for working longer can be destroyed in an instant. And if you’re already at retirement age, you might find it difficult to simply find another job that fully continues the extended work plan you designed for yourself. The financial planning industry uses probabilities when working with clients to develop long-term strategies for wealth maintenance and growth. A planner might say that a particular set-up of investments and time-frame for retirement has an 80 percent chance of providing you with income for the rest of your life. The problem is that life rarely follows the plans one sets, and there are so many variables — each day with hundreds of personal choices and the effect of external influences — that even if you try to follow the plan to the letter and to the day, you may not live the life you’re hoping for.

I love this dose of reality from a recent New York Times article that calls our approach to retirement ridiculous:

Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

As we all know, these abilities are not common for our species.

For the most part, today’s workers will be relying on their kids to support them later in life just as has been the case for almost the entirety of human existence. There are certainly exceptions, mostly at the upper end of the wealth scale, now and throughout history, but the likelihood of retirement plans working out verbatim for even the relatively high income-earners is low, particularly if there is a desire for the type of leisurely living depicted in annoying television commercials for investment firms.

Are you planning to extend your career in order to increase your income potential during retirement? What would happen if the decision to leave work at a time you need to build the extra income is made for you?

Photo: bumeister1
New York Times