Retirement, ready or not

Individuals confronted with the cold, hard truth that they are not saving enough for retirement often comfort themselves by assuming that they will simply work a few more years beyond the normal retirement age.

Postponing retirement by continuing to work kills two birds — if not three — with one stone: employed people continue to earn income and have a longer time frame to build their nest egg; also, during the time they are working, they are not drawing down funds from that nest egg as they would if they were retired. The third advantage comes if they decide to delay collecting Social Security benefits. An individual who waits until age 70, for example, collects an extra 32% in benefits compared with someone claiming Social Security at their normal retirement age of 66.

On paper, it looks like a good idea. The problem is that for many people, life doesn’t work out according to plan.

HEALTH PROBLEMS

Two new surveys bear this out. The first, from the Employee Benefit Research Institute, found that 50% of retirees in its 2014 survey stopped working earlier than they had anticipated. Of those, 60% cited health problems or disability, 27% pointed to changes at their company and 22% said they had to retire to care for a family member.

The other survey, conducted on behalf of the New York Life Insurance Co., found that 51% of the retirees it polled wished they had retired sooner. On average, they would have wanted to retire four years before they actually did.

TAKING A CHANCE

“What the survey shows is that retirees, if given the opportunity, would want four or five years at the front end of their retirement when they are healthy, most active and able to get the most out of their retirement savings,” David Cruz, senior managing director at New York Life, told InvestmentNews contributing editor Mary Beth Franklin.

Advisers who have clients who are not saving enough for retirement and are depending on their ability to work beyond normal retirement age should show these surveys to them. If clients know that they are taking a chance by assuming that they will have the opportunity — and inclination — to work into their later years, they might think twice about taking such a risk and try to save more before they reach normal retirement age.

Retirement can be difficult under the best of circumstances. With escalating health care costs and people living longer than ever, it seems the savings target for a secure retirement is moving beyond the reach of many Americans.

No one likes to plan for the worst — in this case not being able to work as long as one would like — but at the same time, people have to be realistic. That’s the case advisers have to make to their clients.

“If you have a choice, take control of what you can control, and don’t defer the pain until later, when you have zero control over whether you’ll continue to work or not,” Jack VanDerhei, EBRI’s director of research, told Bloomberg News.

Of course, if it turns out that your clients are able to work beyond 66 and they want to, all the better. They will have a bigger nest egg and will likely enjoy their retirement that much more after they call it quits. And they will no doubt appreciate the advice you have given them along the way.