How advisors can help the ‘unretired’ with their return to the workforce

The convergence of low bond prices, high inflation and market volatility has boosted the number of retirees being forced to go back to work.

The ranks of the “unretired” remain swelled as a result of last year’s economic turmoil. Some of those folks still have a lot of catching up to do.

The so-called “unretirement rate,” which measures the percentage of retired workers returning to the workplace, has moderated in recent weeks, yet remains above its pre-pandemic average of 3%, according to the employment firm Indeed, which tracks the flows.

The recent dip in unretirements likely reflects a “dwindling supply of retired workers who can and want to find work,” according to Nick Bunker, Indeed’s economic research director. It’s also a sharp turnaround from 2022, when the unretirement rate marched steadily higher due to a bear market, lessened pandemic concerns and a spike in the cost of living.

“The convergence of low bond prices, a period of high inflation and market volatility has negatively impacted people who were not protected against such risks,” said Ray Bellucci, head of record-keeping solutions at TIAA. “As a result, some retirees needed to reassess whether their savings were sufficient and chose to rejoin the workforce.”

TIMING IS EVERYTHING

The drop in bond prices, along with the S&P 500 sinking 19.64% in 2022, highlights the danger of sequence risk — sometimes called sequence-of-return risk — for retirees and the need to plan ahead, lest they be forced against their wills to return to work.

Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall returns. Studies have shown that account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

Karin Alvarado, managing partner at New Aspect Financial Services, part of Advisor Group, sees it as the greatest risk that retirees face in what she defines as their “fragile decade,” meaning the five years prior to retirement and the first five years of retirement. In her view, most individuals spend their entire working careers accumulating wealth before all too quickly jumping into the distribution phase.

“Failing to create a preservation phase five to seven years prior to retirement can be the biggest mistake an investor makes,” Alvarado said. “Building a ‘preservation bucket’ that has little to no tie to the market creates peace of mind and confidence. It also allows investors to leave their ‘later bucket’ intact and not have to sell while the market is depressed.”

For a younger worker, who may not have accumulated a large nest egg yet, a market drop of 20% will have a minimal impact. But for someone who is at the end of their savings years and needs to start to rely on income, having a large portion of their savings and net worth subject to the same 20% decline can be dramatic.

That said, there are ways to mitigate this risk, said Scott Gegerson, president of Truvium Wealth Management.

“Having a well-diversified investment portfolio is certainly important, but there are other financial products that can offer risk reduction in the form of guarantees, as well as alternative sources of income such as real estate and income generation investments that may not be directly correlated to market volatility,” Gegerson said.

TIAA’s Bellucci suggests including an annuity as one of those “income generation investments,” or maybe even two.

Traditional fixed annuities provide give workers with guaranteed monthly income payments in retirement, he noted, and could be combined with a variable annuity to offset such risks as market volatility and inflation.

CATCHING UP WITH SECURE ACT 2.0

Those unretirees forced to rejoin the workforce will also likely need to catch up with their retirement contributions after taking time off. Luckily, the recently passed SECURE Act 2.0 raises the annual catch-up contribution amount for 401(k)s and 403(b)s to $10,000 for those who are ages 60 to 63 for taxable years after December 2024, allowing those closer to retirement to save more.

That said, even with the government’s help, there are risks associated with playing catch-up when it comes to saving for retirement.

“It’s never too late to save more money, however attempting to catch up retirement savings precludes the saver from compounded interest and the time value of money,” Bellucci said. “Often, people think they can put off saving until they make more money, but unfortunately that is not guaranteed.”

Truvium’s Gegerson added that it’s also important to consider whether an investor is taking on too much additional risk by trying to reach their retirement goals faster than planned. “You may need to adjust your expectations accordingly and plan for an optimal investment strategy that takes into account the time period which you have left before retirement.”

SageView Advisory Group wealth advisor Robert Pearl takes a different tack. In his view, unretirees generally make less than half of their pre-retirement incomes. As a result, he believes the catch-up contribution changes will provide little benefit to those who reenter the workforce.

“Unretirees are using their new incomes to cash flow their current expenses and reduce or stop distributions from their investment portfolios,” Pearl said. “The extra income is taking the sting out of inflation and allowing them to continue to travel, pay for entertainment, and provide gifts or financial assistance to family and friends.”

FIRST THINGS FIRST

The one item on which nearly all advisors agree when it comes to unretirees is that they have a lot to do once they decide to return to the 9-to-5 world. From taxes to planning tools to budgeting, they have many decisions to make.

“When someone decides to unretire, they need to think about their tax return and all the things that earned income impacts,” Pearl said. “Things that should be considered include: If they are already receiving Social Security payments, have they reached their full retirement age? Will this income push them into a higher income tax bracket or move their capital gains tax rate? Will this stop them from completing Roth conversion strategies? These questions should be answered before returning to work by talking with your financial planner.”

Bellucci recommends unretirees investigate what retirement planning tools and support are available through their new — or former — employer.

“Many employers’ retirement plans offer advice and provide financial education to help their participants best understand their benefits,” he said. “The good news is that going back to work for a few years, delaying Social Security to get a bigger future inflation-adjusted check, and adding lifetime annuity income may reduce the risk to your retirement income.”

Finally, when it comes to finances, Gegerson says one of the most important things for unretirees to do upon returning to the workforce is to ensure they have a proper planning and budgeting process in place.

Having a clear plan of action will help individuals prioritize their financial goals, while also providing a framework that allows them to adjust as circumstances change.

“Budgeting should include both fixed and variable expenses, so that individuals are able to maintain an accurate picture of their cash flow,” he said. “Additionally, it is always advisable to understand the full employee benefits that are available. A financial advisor can help with this process by providing tailored advice based on individual circumstances and objectives — it could be the difference between feeling secure and being unsure about one’s financial future.”