The vast majority of older American workers will not have sufficient retirement resources to fund complete retirement at age 65 at their pre-retirement standard of living, according to a recent report by the Stanford Center on Longevity (SCL).1 As a result, they will either need to work beyond age 65, reduce their standard of living in retirement, or some combination thereof. This will cause some soul-searching among older workers, their families and their employers.
American workers repeatedly indicate in surveys that they plan to continue working beyond age 65. The latest such survey, prepared by the Transamerica Center for Retirement Studies, reports that nearly two-thirds (65%) of Baby Boom workers say they plan to work beyond age 65 or not retire at all.2 Of these workers, the vast majority (84%) cite financial reasons for working longer, such as the need for additional income and affordable health insurance, and to accumulate more savings for retirement. But almost three-fourths (74%) also cite healthy aging reasons for wanting to work longer, such as the desire to be active, keep their brain alert and have a sense of purpose.
For older workers and employers alike, it’s important to understand the reasons for continuing to work. This helps older workers be conscious about the type of work that they seek. It can also help employers structure working arrangements that are useful and attractive to older workers.
Potential reasons to work longer are documented in my book Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life,3 as follows:
- You need income to pay living expenses.
- You have a purposeful strategy to delay starting your Social Security benefits and drawing down retirement savings to help optimize the value of these benefits.
- You need affordable health insurance.
- You might be able to meet your basic living needs, but you want some extra spending money.
- You like your work.
- You enjoy the social contacts and fulfillment you get from work.
In addition, there’s also provocative evidence that cor-relates working longer with staying healthier, although cause and effect hasn’t yet been established.4,5 For many workers, there’s no single reason to continue working; it’s more likely a handful of factors at play.
Most older Americans report health statuses that are sufficient to continue working in some fashion. For example, in one study, at least three-fourths of age 65+ Americans reported no health-based limitation in work or housework, as follows:6
- Ages 65-69: 85%
- Ages 70-74: 81%
- Ages 75-79: 77%
However, less than half of these Americans report excellent or very good health; nevertheless, they are still sufficiently healthy to continue working. This identifies a key issue for older workers and their employers to address — how to accommodate older workers whose health might be less than excellent, but nevertheless they still are productive and still have experience and skills to contribute.
Recent research conducted by the Stanford Center on Longevity, in collaboration with the Society of Actuaries, illustrates the financial case for a “down-shift” or “right-shift” strategy.7,8 In this situation, older workers reduce their hours or responsibilities, but they earn sufficient income to cover their living expenses while delaying the start of Social Security benefits and drawdown of retirement savings.
To illustrate the advantages of such a strategy, let’s look at a hypothetical married couple, both born in 1956 and attaining age 62 in 2018. The primary wage earner’s annual salary is $75,000, the spouse’s earnings are $25,000, for a combined household income of $100,000. They have accumulated $350,000 in retirement savings by age 62. Note that both the household income and retirement savings amounts are above both the median and average amounts reported in the SCL report for mid-Boomers (those born between 1954 and 1959).
Here are estimated annual retirement incomes for this hypothetical couple at various retirement ages, including both Social Security benefits and systematic withdrawals from savings:
- $42,586 if they both retire completely at age 62 and start Social Security benefits and the drawdown of retirement savings.
- $55,048 if they both keep working part-time until their Social Security Full Retirement Age (66 and 4 months), then start Social Security and the drawdown of retirement savings.
- $56,869 if they both keep working full-time until their Social Security Full Retirement Age (66 and 4 months), then start Social Security and the drawdown of retirement savings.
- $69,379 if they both keep working part-time until age 70, then start Social Security benefits and the drawdown of retirement savings.
- $73,167 if they both keep working full-time until age 70, then start Social Security benefits and the drawdown of retirement savings.
Notes to this example:
- If they continue working full-time, their earnings count to increase their eventual Social Security benefits, and they contribute 10% of their income to their retirement savings each year until they retire.
- If they continue working part-time, their earnings do not count to increase their eventual Social Security bene-fits, and they stop contributing to retirement savings.
- The estimated withdrawals from savings use the IRS required minimum distribution, modified for retirements before age 70 as described in the Spend Safely in Retirement Strategy.8
Retirement planners often suggest an adequate retirement income to equal 70% to 80% replacement of a worker’s pre-retirement income to replace their pre-retirement standard of living. Let’s restate the above examples as replacement of the household’s pre-retirement pay:
- 43% if they both retire completely at age 62, start Social Security benefits and the drawdown of retirement savings.
- 55% if they both keep working part-time until their Social Security Full Retirement Age (66 and 4 months), then start Social Security benefits and the drawdown of retirement savings.
- 57% if they both keep working full-time until their Social Security Full Retirement Age (66 and 4 months), then start Social Security benefits and the drawdown of retirement savings.
- 69% if they both keep working part-time until age 70, then start Social Security benefits and the drawdown of retirement savings.
- 73% if they both keep working full-time until age 70, then start Social Security benefits and the drawdown of retirement savings.
This example illustrates a few significant conclusions:
- Delaying retirement, even if for a few years, can significantly increase the eventual retirement income.
- Most of the increase in retirement income comes from delaying both Social Security benefits and drawing down savings; the additional salary and retirement contributions made between age 62 and retirement only modestly increase the eventual retirement income.
- Many workers will fall short of commonly recommended retirement income targets, unless they can find a way to work into their late 60s or 70s. If they can’t continue working, they might need to learn how to live on a reduced standard of living compared to their retirement years.
For many older workers, there's no single reason to continue working; it's more likely a handful of factors at play.
These types of projections can help older workers decide when to retire, and whether to continue working full-time or part-time until they retire. It can also help them decide if reducing their standard of living is an acceptable price to pay for their ability to retire.
Retirement Game-Changers describes various ways that older workers can continue working:
- Continue at your current job, full time or part time, as long as it meets your needs and your employer is satisfied with your performance.
- Do the downshift: Work just enough to cover your living expenses, keep up your social contacts with fellow employees and possibly continue health insurance at work. This would free up some time to enjoy your life more and enable your financial resources to grow as long as possible.
- Find a bridge job, where you work for a few years between a full-time job and full retirement.
- Pursue an encore career, where you work at a new career for several years, often giving back to society, working for a nonprofit or pursuing a keen interest. Encore careers often build on the skills and contacts you’ve made during your career years.
- Create or expand on a “slash” career that combines making money with pursuing your interests. For example, someone who calls herself an “accountant/yoga instructor” might still work both jobs but perhaps do more yoga and less accounting to fully enjoy her work.
- Volunteer for a cause you believe in, or sign up for an internship, either of which might lead to paid work.
- Start your own business, preferably without spending a lot of money to get it going.
- Become self-employed as part of the gig economy. This often involves doing projects or contract work.
An additional benefit of offering alternative career paths could be the opportunity to transfer knowledge and mentor younger workers.
Future research can provide insights into the prevalence of these types of continued employment, and whether older Americans are satisfied with these arrangements. Research can also provide insights into whether retirees are satisfied working a little in their retirement years or living on a reduced standard of living.
How can employers help older workers address these serious challenges? Here are some ideas:
- Help older workers prepare retirement income estimates at various ages, similar to the example in this article, to help them understand the implications of when they should retire and whether it’s desirable to work part-time for a while. To meet this goal, employers can prepare and distribute retirement income statements, host retirement modeling tools, and/or offer retirement advice through the 401(k) plan.
- An important potential component of an employer’s over-all “retirement plan” could be to offer alternative career paths for older workers who want to continue working but reduce their hours or responsibilities. Alternative career paths could include regular part-time work, seasonal work or project work.
- An additional benefit of offering alternative career paths could be the opportunity to transfer knowledge and mentor younger workers. Older workers could be granted “emeritus” or “senior advisor” status. This idea can help address a key challenge, which is enabling older workers to step down in their responsibilities with dignity.
- Employers can examine the work environment and/or restructure job requirements to accommodate older workers who are sufficiently healthy to work, but are in less than excellent health.
- Obtaining health insurance before Medicare eligibility at age 65 is a crucial retirement planning challenge for most older workers. Employers could offer health insurance for older workers who choose an alternative career path. They also could extend COBRA coverage beyond the minimum requirement of 18 months, for older workers who lose eligibility for medical benefits by retiring or reducing their work hours.
- Employers could extend their health wellness programs to older part-time workers and recent retirees, and offer financial wellness programs to help workers and retirees learn how to make the most with reduced incomes.
These ideas send a powerful message that will inspire the entire workforce: The employer is compassionate and cares about their older workers.
U.S. society is in a transition phase as it tries to figure out how to deal with the many older workers who are trying to finance longer lives. This is a nice challenge to tackle when you think about the amazing 30-year increase in average life expectancies during the 20th century.9
Steve Vernon is a research scholar at the Stanford Center on Longevity and is president of Rest-of-Life Communications.
1. "Seeing Our Way to Financial Security in the Age of Increased Longevity.” Stanford Center on Longevity, October 2018.↩
2. “18th Annual Transamerica Retirement Survey: A Compendium of Findings About American Workers.” The Transamerica Center for Retirement Studies, June 2018.↩
3. Vernon, Steve. Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life. Rest-of-Life Communications, June 2018.↩
4. Adam, Stephane, Eric Bonsang and Sergio Perelman. “Does Retirement Affect Cognitive Functioning?” Journal of Health Economics, Volume 31 (March 2012).↩
5. Rohwedder, Susann, and Robert Willis..“Mental Retirement.” Journal of Economic Perspectives, Volume 24 (Winter 2010).↩
6. Lowsky, DJ, SJ Olshansky, J Bhattacharya and DP Goldman. “Heterogeneity in Healthy Aging.” Journal of Gerontology, June 2014.↩
7. Pfau, Wade, Joe Tomlinson and Steve Vernon. “Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A Framework for Evaluating Retirement Income Decisions.” Stanford Center on Longevity. November 2017.↩
8. Vernon, Steve. “How to ‘Pensionize’ any IRA or 401(k) Plan.” Stanford Center on Longevity. November 2017.↩
9. National Center for Health Statistics. “Health, United States, 2015.” U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics. June 2017.↩