Winston Churchill may have once referred to Russia as a "riddle, wrapped in a mystery, inside an enigma," but this might as well be an apt descriptor of the concept of retirement as well.
On paper, retiring seems like it should be a relatively easy venture. An individual establishes the goals he wants to reach by retirement, he fabricates a plan to make that happen over the course of his working lifetime, and he saves money and invests for the future according to his plan. It seems simple, but the statistics show that it's nothing of the sort.
According to survey released last year from the Employee Benefit Research Institute and Greenwald and Associates, of the roughly 1,000 workers questioned, 60% had less than $25,000 saved toward their retirement, not counting defined-benefit plans such as a pension, or the value of their primary residence. What's more, greater than a third (36%) of respondents didn't even have $1,000 saved for their retirement. Long story short, more American workers than not look woefully unprepared for retirement.
However, if we've learned anything from the rash of recent surveys warning of a potential retirement shortfall for baby boomers, it's that the actual meaning of retirement has changed completely.
Take everything you know about retirement and throw it out the window
Look up "retirement" in the Oxford dictionary, and you'll get this definition: "The action or fact or leaving one's job and ceasing to work." Note that little part there are about ceasing to work? The reality of retirement in today's terms is that a majority of people who "retire" won't actually stay retired.
An updated study released in May from the U.S. Bureau of Labor Statistics and researchers at Boston College of approximately 20,000 Americans aged 50 and up showed that less than a quarter of respondents fit the Oxford definition of "retired" and remained out of the workforce for good.
The study, which culled data from the Health and Retirement Survey conducted by Michigan University, examined the retirement patterns of seniors between 1992 and 2010. Specifically, Boston College and the BLS partitioned workers into four categories:
- Traditional retirement, whereby a person leaves the workforce for good.
- Bridge job, whereby an individual retires from her full-time job and seeks out another part- or full-time job.
- Phased retirement, whereby a worker simply scales back his production at a current employer.
- Unretirement, whereby a worker leaves the workforce, then for whatever reason, reenters the workforce a few years later.
The findings showed that more than half of all men and women (57% of men and 54% of women) left their career job and wound up landing a bridge job. Another 13%, or one in eight, wound up coming out of retirement after a few years to reenter the workforce. Additionally, between 11% and 14% of men and 6% to 9% of women scaled back their workloads with their long-term, full-time employer.
Adding up the percentages, it means less than a quarter of seniors aged 50 and up have retired "by the book," with a marked skew away from the traditional meaning of retirement for early baby boomers.
The study also examined the reasoning for the above trends. For starters, workers who retired younger more commonly sought a bridge job, and not surprisingly, the younger a worker is, the more likely she is to find employment. As it relates to income, wealthier individuals who landed a bridge job simply did so for lifestyle reasons, while lower- and middle-class individuals often did so because they needed extra income. Finally, if workers had defined benefit plans (e.g., a pension) in their back pocket, they were less likely to return to the workforce.
Take back your retirement
The key point American workers should be taking from this updated BLS and Boston College analysis is that no one's retirement has to fit any particular mold but your own; it's important you retire on your own terms.
So, how exactly do you take back your retirement? There are a number of strategies to consider that can boost your nest egg and give your money a chance of lasting longer during retirement.
The first suggestion echoes a trend we're already seeing. If you're behind where you should be in terms of saving for retirement, consider working past the psychologically important retirement age of 65. Working longer gives you a better opportunity to save money, invest for the future, and perhaps most importantly, to hold off on filing for Social Security benefits. If you can hold off on filing for benefits until age 70, you'll receive your maximum possible monthly benefit payment, which could give you a better chance of meeting your monthly expenses during retirement.
However, working forever, or past the common retirement age, may not be in the cards for some people, and you should certainly prepare for this. It's possible your health may not cooperate, or you may not fit into your employers' long-term plans when you reach your 60s or 70s.
So, what should you do? The very first thing to consider is creating a budget so you have a handle on your monthly cash flow. If you don't understand your cash flow, then it's practically impossible to optimally save for retirement. Keep in mind that a monthly budget has some wiggle room and can be adjusted from time to time, but it's an important first step to getting your foundation for saving money in place.
Another consideration is to gradually adjust your spending habits months or years before you retire. The financial shock of a sudden retirement can sometimes catch people off guard if they haven't adjusted their spending habits to what's likely to be a drop-off in monthly income. Gradually reining in your spending for months or years prior to retirement can afford you a smooth transition into retirement, and it could help extend the life of your nest egg.
You've probably heard it dozens of times previously, but focusing on tax-advantaged retirement accounts is another incredibly smart move to consider taking. For example, a Roth IRA allows your money to grow over the long term completely free of taxation, as long as you don't make any unqualified withdrawals. In 2015, the maximum annual contribution to a Roth is $5,500 for people age 49 and under, and $6,500 for people aged 50 and up. With no age mandate requiring you to withdraw a certain percentage of your money, and no age cutoff when you can no longer contribute (unlike a Traditional IRA, which caps off in the year you turn 70), the Roth IRA is truly meant to provide a comfortable retirement to those who save and invest as early as possible.
Understandably, changing your path to retirement isn't done in the flick of a switch, but making some, or all, of these changes could gradually put you on track to retiring on your own terms.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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