Retirement? What retirement?
Faced with a reduced (but recovering—so far) portfolio, children still in college, and not a clue what else I would rather do, I’ve given some thought to simply working forever. Not a bad plan, if I can manage it.
Many people think they’ll have to work forever—and they aren’t particularly happy about the prospect. By 2020, most baby boomers will be in their 60s, and about half of them think they will delay retirement beyond age 65. (We haven’t yet seen much evidence that the first wave of boomers to reach their 60s are choosing to delay retirement, but time will tell.)
Before the introduction of Social Security, the burden of lifetime financial support rested squarely on the shoulders of workers and their families (except for the lucky few with pension plans). Many people didn’t stop working until failing health gave them no other choice. Social Security introduced partial income replacement for a broad swath of the American work force. (The value of this income replacement is measured by what’s known to Social Security administrators and financial planners as the replacement ratio.) Today, the key to being able to retire, assuming you’re in good health, is a combination of income replacement and personal savings.
The rapid decline of traditional pensions has altered the picture once again. Factor in Social Security’s increase in the “full retirement age”—which lowers the replacement ratio at any given age—and you have to wonder if workers will continue to elect early Social Security benefits. Will they instead keep working, in order to improve that replacement ratio? The answer, of course, depends on how much workers save, Social Security policy changes, the economic environment, and a host of other factors, some of which are unpredictable.
I was reading a research paper from the Center for Retirement Research at Boston College recently. It discusses the impact on Social Security checks of:
- An increase in the Social Security full retirement age, from 65 to 67.
- Rising Medicare Part B premiums.
- Higher income tax on Social Security benefits, a growing likelihood.
The paper used data from 2002, and some of the numbers are probably outdated. But the concept holds. Combine these three factors, and you’re looking at a tsunami.
A “medium earner” who fully retires at age 65 has a lower replacement ratio than someone who retires at 67. In 2006, the difference was about 8.9%. But in the future, the factors I mentioned above will increase the gap even more. To fill that gap, we’ll need to work longer. The question is, how much longer?
Based on the same research paper, and not taking into account any unforeseen changes to Social Security (those other than the three listed above), someone retiring in 2030 would need to work approximately 3½ additional years to achieve the same replacement ratio that’s available to those who take full retirement benefits today. That means that instead of retiring at 65, boomers born in 1965 will need to work until about age 68½.
If a medium earner accumulated substantial savings in a 401(k) or other accounts, the picture brightens considerably. The researchers assumed savings sufficient to purchase an annuity income stream equal to a replacement rate of 20%. This shaved the additional work time to just over two years—a significant improvement.
I don’t believe any of these numbers are precisely accurate. That’s not possible. But they do raise an essential question: If there hasn’t been a fundamental shift in your personal savings, what other choice do you have but to work longer?
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Well, to me the other obvious choice would be to reduce one’s standard of living. But, if one is unable or unwilling to make a fundamental shift in one’s personal savings, then I have my doubts that one would be able or willing to make do with less. It can be done, though, and I’ll bet a lot of folks will be surprised at how much they can do without or with less of.
Most of the tricks to living below your means can be learned from those who survived the Great Depression, like my grandparents. If I had a nickel for every time my grandmother told us kids “Waste not, want not.” I’d have a lot of nickels. Re-use, recycle, stretch things out, eat leftovers, clip coupons, etc. Most people would be amazed at how “disposable” their everyday lives have become.
Even if you decide to work longer, taking grandma’s advice is still a good way to go.
You do need to note that the “full retirement age” for Social Security has already been increased to 66 for those born after 1938 and will increase gradually (under current law) to 67 for those born after 1960.
My planning has been based on those facts for a number of years now.
People are living longer now than they were when Social Security began — statistically speaking — so it is only right for full retirement age to go up. The plan was never for us to live a third of our life in retirement. But note, for Boomers, full retirement eligibility is 66, not 65.
For many people, the most fundamental question for changing the retirement income/expense ratio is deciding where you will live. For those living in places with high cost of living, selling the house and moving to some place cheaper can reduce expenses dramatically. And this has been a traditional way that retirees have stretched their money — why so many now live in places like Florida, Arizona, Nevada.
Of course, non-financial factors are very important to such a decision: will you end up living far from family and friends? will you lose a medical services network that is high quality and already knows you well? And so on.
Like so much else in life, we have to decide what we really want, and what we are willing to give up to get it. Personally, I am trying to avoid moving to trade down my living expenses. I already live in one of the highest quality of life places in America.
I retired 13 years ago and had paid off my mortgage many years prior. I think that a critical move since the imputed “tax free income” has far exceeded what my return would have been on equivalent money invested. For my time period, I have invested over-conservatively by many advisors’ thinking but it has paid off in peace of mind and in this latest market by no negative return. As a saver, I feel that much of my potential income has been attenuated by Fed policies which favor the banks and cause stock market like fluctuations in heretofore conservative income investments. However, I am grateful for the many years that I have been with Vanguard, a low cost group of great integrity. I notice that people who advocate later retirement usually have sedentary jobs with lots of vacation and great perks—congress for example. This does not describe the general population I am sure.
I won’t be retiring until at least age 66 & with the increased interest rates on credit cards, I’ll probably be working a bit longer. Both my TSP and IRAs (Roth & Traditional) took a beating and if I go on Suze Orman’s view, I’ll not be retiring until at least 70. I’m fortunate in that I’ll be receiving 2 pensions, one from the federal government & one from my former employer. So far they have not reneged on their pension plan. Then I’ll have Social Security which at age 66, I’ll receive my maximun benefit. But to cover my bases, I’m going back to school and taking up some classes that will allow me to work in the medical field. Being a Boomer, I’m very much aware that health issues are going to be a top concern as we get older regardless how well we take care of ourselves. I’m planning ahead. I’m too old to fool myself.
The question of retirement and when to do it and what to do in retirement is one that will not be answered until one does it and experiences it. I recently read that most couples disagree on what to do when retired and when to actually start retirement. My wife is retiring in 1 year from teaching and is 6 years older than I am. I will have to work for 11 more years to reach my railroad retirement age, so this subject is already upon me -what is she to do and what am I to do??? She wants to travel, but we have a daughter in college, and I still have to work.
Facts I do know that will help are saving and contibuting to 401k and Roth IRA’s for both of us. Staying healthy. Living below my means now and in retirement. I plan on working somewhere doing something even after I retire to at least help pay bills and to stay active. I personally come from a background of parents that believe you never really retire, just slow down a little. I met a man that is still working at the age of 77 this past week and he told me the reason he was working was that you have to do something.
A thoughtful article on the future of Social Security and retirement.
But I have a different take on your statement “If a medium earner accumulated substantial savings in a 401(k) or other accounts, the picture brightens considerably.” —that assumes the rules won’t change regarding how much of your earned social security payment the government will confiscate IF you have a substantial amount saved for retirement in a ROTH, IRA, or taxable account. And then there is the question “How much is a substantial amount?” What concerns me is that the majority of Americans have very little saved for retirement, and politicians want to please the majority of their constituents because…..what is the most important issue for a politician? To get re-elected.
I turned 62 last week. I am retired from the Army Reserves and from a major oil company. But I still work because my wife cannot get her school principal retirement for another 3 years AND because my consulting income is very lucrative.
If my consulting business dries up in the Great Recession I will have to goof off around the house for 3 years until my wife’s retirement will allow us to travel together.
I agree with the comment ‘I notice that people who advocate later retirement usually have sedentary jobs with lots of vacation and great perks—congress for example. This does not describe the general population I am sure.’
Congress is good at advocating what it does not apply to itself. I belong to the working disabled, for how long I can work I am not sure, yet I am nowhere near age 66.
By taking away pensions, reducing social security, the safety net is being torn apart. When we face the prospect of old age with no sense of financial security, lack of adequate health care, who in their right mind would want to live longer?
I’m 71 years old now and ‘retired’ at age 57. For the first six years or so we traveled full time in an RV and did volunteer work in State Parks in the western states. We bought a house so that I could go back to college and work part time. Since then - 8 yers ago - I’ve worked full time or more and loved every minute. My employers have asked me to go into management frequently but I refuse. I’d have to care about flawless openation rather than working as a clerk concerned with only my professionalism, not that of the entire organization. My employers are delighted and so am I. Funny how they seem to appreciate my being on time, working quickly and accurately, and leaving my hourly job for the day when I’m done with my assigned work. It’s a blast. I enjoy the people I come into contact with. I get to leave my home for several hours each day to earn a small wage. My life is fuller than it would be just living off my retirement savings and pension and Social Security. Try it. It’s great.
I admire those folks in their late 60s and 70s still working. It’s my goal as well. I want to have some security, but I also want to continue to do a job. Doing a job has been and is very important now in my late 50s. I don’t know what I’d do without it, and probably like most people there are expenses. I’m now supporting my folks in their 80s and buying them a home (the one they lived in did not escalate and in their 80s it was 2 story which wasn’t acceptable with my father’s health). So this boomer plans and hopes to continue working as long as she is able, and I tip my hat to those still doing so. It’s important for all individuals to find whatever brings them value - working brings me mine.
I recently spent some time with a friend who has spent his working life in the construction industry. Although he has done well building homes, he never left actual physical work and at 59 his body is in tough shape. On the other hand, I have spent my working years in highly stressful management positions and am feeling burned out. Each of us have worked long hours, well past a standard eight hour day. What we discovered was that both of us, for different reasons find the thought of working until we are 66 (our “normal” retirement age) a real push and doubt we can make it. Instead of “extending” the working period, by raising the normal retirement age Congress has, for many people, effectively reduced the benefit. I shudder when reading articles recommending further increases in the retirement age. We may be living longer, but our stressful work and lifestyles have left many unable to do what “work” today requires.
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Hi I have a question!!!!,
I am currently 33 years old and I have been using a Supplemental Retirement Annuity (SRA) plan (a voluntary 403(b) retirement plan) since a few years ago when I realized how important was saving for my retirement, I have been putting a 6% of my salary on it and an equivalent amount in another mutual funds company. I am now considering to take a break from work in order to take my certification exams and applying for residency programs (given that I graduated from a foreign university program). I am wondering what do i do with the money in my retirement fund, do I have to take it out when I live my current work or I just leave it there until I reach my retirement age??
Any inputs will be greatly appreciated, have a great weekend!