Market Daily

Market Daily

The Pitfalls of Counting on Extended Employment as a Retirement Strategy

Image commercially licensed from: DepositPhotos

Retirement Age Realities

Working longer may seem like a prudent way to secure your retirement, but it’s a strategy fraught with challenges and uncertainties. In this section, we’ll delve deeper into the intricacies of this approach and the reasons behind its potential pitfalls.

A Gap Between Expectations and Reality

Americans’ retirement expectations often clash with the reality they face due to unforeseen circumstances. The common belief is that one will retire at a certain age, but life doesn’t always adhere to these plans. The 2022 Gallup poll unveiled a sobering truth – while the average expected retirement age was 66, the actual retirement age averaged 62, creating a consistent gap over the years. This discrepancy points to a fundamental issue in retirement planning.

The Unpredictability of Early Retirement

A significant portion of retirees, about 46%, found themselves leaving the workforce earlier than planned, as revealed by the Employee Benefit Research Institute’s 2023 Retirement Confidence Survey. This shocking statistic underscores the unpredictability of early retirement, where external factors often intervene, forcing individuals to adapt to a reality they hadn’t foreseen.

The Illusion of Working Longer

Despite intentions to work until a later age, the reality often falls short. David Blanchett, a certified financial planner, suggests that reaching the planned retirement age can be elusive. The illusion of working longer can be deceptive, with many individuals realizing that their aspirations to work well into their 60s or 70s may not align with the practicalities of their situation.

The Financial Impact of Delayed Retirement

Delaying retirement by a few years can have a remarkable financial impact. This extension of one’s regular income not only provides financial stability but also allows for more time to save and invest. As time goes by, assets may (hopefully) grow, and individuals can delay claiming Social Security benefits, guaranteeing a higher monthly payout for the rest of their lives. This section emphasizes the positive financial effects of postponing retirement.

Countervailing Trends

While retirement age is pushed back, other factors such as increased life expectancy and the shift from pensions to 401(k) plans come into play, influencing when and how people retire. Social Security’s full retirement age has gradually been pushed back, reaching as late as age 67 for anyone born in 1960 or after. Americans are living longer, meaning they need to amass more savings to fund their lifestyles in old age. The shift from pensions to 401(k)-type plans is also a factor, as pensions generally offer an incentive to start collecting benefits at a certain age, whereas no such trigger exists in 401(k) plans.

Early Retirement: Unforeseen Events

Unpredictable events, like health issues or changes within one’s company, can force early retirement, often leaving individuals with less control over their plans. This section explores the factors that lead to early retirement, emphasizing that many individuals are caught off guard by circumstances beyond their control. Approximately 35% of retirees found themselves retiring earlier than planned due to hardships like health problems or disabilities, while 31% did so because of changes at their company. These are elements one cannot control.

Job Loss and Its Consequences

Job loss, especially for older adults, can have significant consequences. Many older workers who lose their jobs struggle to regain their previous income levels, largely due to ageism in the workplace. Job loss is a serious concern for older adults. More than half, 56%, of full-time workers in their early 50s get pushed out of their jobs before they’re ready to retire, often due to circumstances like layoffs. The 2018 paper published by the Urban Institute reveals that just 10% who suffered an involuntary job separation in their early 50s ever earn as much per week after their separation as before it. In other words, 90% earn less — “often substantially less.” Job loss can be a daunting challenge for those nearing retirement.

The Uncertainty of Staying Employed

While working longer may be an attractive option in theory, the reality is less certain. Workers should avoid relying on extended employment as their sole retirement strategy. This section underscores the uncertainty of staying employed for as long as one desires. The changing dynamics of the job market make it challenging to predict the length of one’s career. Today’s strong labor market may make it easier for older workers to find new employment opportunities, but it’s unclear how long this strength will last.

Adapting to Changing Circumstances

In today’s dynamic labor market, it’s essential for older workers to remain flexible. Some retirees may find part-time opportunities to supplement their income and adapt to unexpected early retirement. This final section offers a ray of hope for those who encounter early retirement. It suggests that in the current labor market, especially for those who can work from home, there are opportunities for part-time gigs to help mitigate the financial impact of retiring earlier than expected.