With millions of workers hurtling headlong toward a retirement savings crisis of colossal proportions, many of them are stuck with having to choose from several equally unappetizing options. Without enough money set aside to retire comfortably at the traditional age of 65, workers have to decide whether they're willing to set aside their dreams of a high standard of living during their golden years. And if they aren't, many have decided that extending their careers by five years or more may well be the best option available to them.
Unfortunately, counting on being able to work as long as you want is no more realistic than assuming you'll be able to get a certain return on your investments. Given the number of unpredictable factors involved, it's extremely dangerous to assume that you can address all your financial woes simply by being willing to work longer.
Hard facts
The Employee Benefit Research Institute decided to take a close look at the issue of workers staying in their jobs longer. Given the popularity of a longer career as a response in many of the surveys that EBRI has conducted in the past, the Institute believed it was important to figure out whether such a strategy would actually work.
On its face, the strategy makes plenty of sense. By working five years longer, you make several positive contributions to your financial condition in retirement:
- Drawing a paycheck for five extra years lets you continue building your savings that much longer, leading to a bigger nest egg by the time you need it.
- Moreover, because you'll be five years older before tapping your retirement savings, you should be able to spend more. The trade-off from having fewer years to enjoy your retirement is that you don't have to stretch your money as far.
- Social Security also gives you some extra benefits if you wait until age 70 to start taking monthly checks. For baby boomers who defer taking Social Security beyond the normal retirement age of 66, monthly checks can be as much as 32% larger if you don't start until age 70. Similarly, buying immediate annuities at a later age can give you better returns.
EBRI looked at a number of different research projects designed to calculate the impact of working longer on retirement saving success. One study consistently showed much greater success rates from working longer, while a second study was far more conservative on the impact extra work would have.
As it turns out, much of the distinction hinges on the costs of long-term care. Because nursing home and other long-term care solutions are extremely expensive and typically not covered by Medicare, they can soak up the extra savings from working five extra years in almost no time at all. Moreover, MetLife (NYSE: MET) has stopped selling long-term care insurance, while Prudential (NYSE: PRU) cut back on individual long-term care coverage and Genworth Financial (NYSE: GNW) announced major changes to its long-term policies. Without these insurance options, it's very difficult to protect yourself from the potentially devastating impact of a debilitating injury or illness.
The bigger problem
One thing the EBRI study doesn't really address is the fact that many people don't have the choice of getting to work as long as they want. Injuries and illnesses can strike during a career as well, and most people don't have enough disability insurance to make up for lost wages and added expenses. With unemployment running at high levels, you can get laid off in an instant, wrecking any plans you might have had to work longer. With big employers Hewlett-Packard (NYSE: HPQ) and PepsiCo (NYSE: PEP) resorting to massive job cuts, it's hard to think of anyone's job as secure enough to count on through age 70 and potentially beyond.
On the other hand, EBRI did identify one factor that helps people succeed: participating in a 401(k) plan. The study found that people were more likely to improve their situation if they spent the extra years of work contributing retirement savings into a 401(k).
In the end, being flexible toward the idea of working longer is a good thing to have in your arsenal. But by itself, it's not enough. You also need to make the most of your savings, with smart investments that provide top returns.
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