Allen McLellan, a retired financial adviser and faculty member at The American College, tells the story of one of his former clients, who was not financially ready to retire but desperate to get out of a workplace because she was sick of her bosses and office politics. Knowing that her retirement income stream depended on her working three more years, Mr. McLellan asked her what would make it palatable for her to stay on the job.
Her answer was that she needed an incentive. Mr. McLellan, knowing her desire to travel in retirement, persuaded her that working three more years would give her the extra income to allow her to take more vacations. This realization helped the client feel more in control of her situation and enabled her to view her job as a means to a valuable end. The client now is well into retirement and still sends Mr. McLellan postcards when she goes on a trip, thanking him for his advice.
Besides this personal story about the power of deferring retirement, a number of recent studies have attempted to quantify the financial impact of staying on the job a few years longer.
A 2012 study for the Retirement Research Center at Boston College tackled this issue directly, finding that the percentage of workers who would be financially prepared for retirement increases from 49% with a retirement age of 65 to 85% if the individual worked five years longer and retired at 70.
A 2013 research study by David M. Blanchett published in the Journal of Financial Planning looked at the impact of deferring retirement on a hypothetical retiree. In his scenario, delaying retirement by just a single year increased the probability of success for a retirement portfolio by nearly 10.6%.
Maybe the most interesting current research on this topic indicated that there may be more than just financial benefits from deferring retirement. In a recent report out of the United Kingdom entitled “Work Longer, Live Healthier,” researchers found that being retired negatively affects physical, mental, and self-assessed health. Furthermore, the study reported that the adverse effects increased the longer the person was in retirement. The study concluded that working longer would improve the average health of retirees.
With this constant stream of research demonstrating the benefits of working longer, one would expect the average retirement age to increase. However, in reality, the average retirement age continues to hover right around 62, with many people still leaving the workforce before they are financially ready to retire.
In addition, nearly 47% of people retire earlier than they planned. This early retirement trend could be a significant problem as Employee Benefit Research Institute reports that the baby boomers are facing a $4.3 trillion retirement income shortfall.
Even though staying employed longer could be beneficial to an older worker, there are a variety of barriers and reasons that encourage people to retire early. For example, many people's health declines to the point where they can no longer work.
Additionally, many elderly workers are encouraged by their companies to retire and accept slightly higher retirement benefits. While slightly higher retirement benefits might seem appealing at the time they are offered, early retirement could be detrimental to the worker.
So the question remains, what strategies can encourage clients to delay retirement without decreasing their standard of living and overall life. One strategy is to free up additional cash in order to enhance the individual's lifestyle in the years prior to retirement, making delayed retirement more palatable. Whether this strategy makes sense for an individual client depends in part on the value of savings in the last few years prior to retirement as compared with the value of deferring retirement.
Let's take the example of a single client who is 60 and has $100,000 of annual income. This client has accumulated a $700,000 portfolio that is expected to replace 50% of his or her income in retirement with additional income needs coming from Social Security. Now, let's compare two options. With option 1, the client continues to save 15% of his or her income each year and retires at age 64. With option 2, the client completely stops saving and spends that 15% to improve lifestyle, but also works two years longer, retiring at age 66.
In making this comparison, a simple calculation was used assuming a consistent 7% pre-retirement rate of return, a 6% post-retirement rate of return, 3% inflation, and a 2% salary increase each year. It was also assumed that the portfolio would be used to support the full income need until it is depleted.
In option 1, the full 50% income need can be supported through 87 but assets will be completely depleted by 89. With option 2, the portfolio will support the full 50% income need through 90 and assets will be completely depleted by 92. By working two years longer and not saving any money, the client was able to meet retirement needs for three more years.
These calculations were created based on assumptions we set forth in the article and by using BankRate's Retirement Planner Calculator.
So, how can those extra funds that are now being spent instead of saved be leveraged to support deferring retirement? One option is to reduce the worker's responsibility for providing care-giving services to family members. Care-giving can take a toll on the health and well-being of the worker, making it harder to continue to work. Funds can be used to pay for home health workers, adult day care, an assisted living facility, or nursing care. Other options include elder-care coordinators or even paying long-term-care insurance premiums for a family member. Spending money on these issues can help relieve some of the stress placed on the client, could help the care recipient receive better care, and could help the worker refocus on their full-time job instead of splitting time, energy, and focus between care-giving and work.
Another option is to spend more money to help the worker avoid burnout at work. By using up vacation days and spending more money on vacations, the client might feel less stressed and view the workplace more positively. Another option is to spend more money on going to the theater, watching more movies, attending sporting events, eating out at restaurants, or pursuing hobbies such as dancing, yoga class, golf or other sports. Being more engaged in activities outside of work can help a client tolerate a job that is no longer satisfying.
There are also those clients who are deferring travel and other activities until they retire. This may make them more anxious to begin retirement. However, it is not always necessary to defer travel until retirement; people can start working on their bucket list while still working. Additionally, being more active and previewing retirement provides the individual with an opportunity to test out activities that they may enjoy once they stop working.
One of the primary reasons people retire earlier than planned is bad health. Spending on more leisure time can reduce stress and, in turn, mitigate health problems. Funds can also be spent more directly on activities supporting good health like weight loss programs, smoking cessation, visits to a nutritionist or joining a gym.
Spending can also be more practical. For example, money that might otherwise be saved could go directly to improve employment security. Paying for memberships in professional organizations provide opportunities for professional networking and continuing education. Educational opportunities are critical to keeping knowledge up-to-date, connecting the client to their profession and ensuring that the older worker remains relevant. In some cases, professional seminars are held in fantastic locations, allowing continued education, professional networking and vacationing to be combined.
Some older workers might be looking for a career change and pursue a degree or professional designation. In some cases, spending money on a career counselor can be beneficial to the older worker looking to redirect their focus.
Finally, suggesting the client defer retirement by spending more should help the older working client enjoy their current life more and also improve their retirement security. This helps the client feel more connected to the retirement process and better understand how their retirement will look. This improved lifestyle, retirement security, and view of retirement should benefit the client and the client-adviser relationship for many years to come.
Jamie Patrick Hopkins is an assistant profession of taxation and the associate director of the New York Life Center for Retirement Income and David Littell is the director of the New York Life Center for Retirement Income at The American College.