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How Long Will You Have to Work? 

Most of us have grown up in an era when the dream is to retire as soon as possible — age 65 or sooner.  In fact, almost half of men retire at age 62 and half of women retire at age 60 (Source:  Financial Planning, September 2007).  But if you haven’t retired yet, a whole host of trends make retiring at age 65 seem difficult:

•   Fewer individuals are covered by defined-benefit plans.  For years, the trend has been away from defined-benefit plans, which provide a guaranteed retirement benefit paid for by your employer, to defined-contribution plans, where you are responsible for making contributions.  Currently, only 21% of the work force is covered by a defined-benefit plan (Source:  Fortune, June 26, 2006).  But even those workers can’t be assured of those benefits.  While companies can’t take away benefits that are earned, they can change future benefits, which could result in significantly lower benefits than expected.

•   The Social Security system will face increasing pressure in the future.  Due to the unprecedented number of baby boomers who will be retiring in the near future, there will be fewer workers to pay the benefits for retirees.  In 1950, 16 workers were paying for each retiree’s benefit.  Currently, there are 3.3 workers supporting each retiree, which is expected to drop to only 2 workers for each retiree in 40 years (Source:  Social Security Administration, 2007).  By 2041, unless changes are made to the system, benefits will need to be reduced by 25% to equal revenues collected (Source:  Social Security Administration, 2007).

•   Life expectancies continue to increase.  Average retirement ages have been declining while life expectancies have been increasing.  Today, at age 65, the average life expectancy is 82 years for a man and 85 years for a woman, compared to 78 years for a man and 81 years for a woman in 1960 (Source:  National Center for Health Statistics, 2007).  And these are just averages, meaning 50% of 65-year-olds will live longer than this.  Also, retirement ages have been decreasing.  Currently, the average retirement age is 62 (Source:  Center for Retirement Research, July 2006).  Thus, with younger retirement ages and increased life expectancies, the average retiree has fewer years to accumulate savings, but must accumulate more savings to last a longer time period.

•   Health-care costs are becoming more of a burden.  More and more companies are reducing or eliminating health-care insurance for retirees, and health-care costs tend to increase faster than overall inflation.  A recent report estimates that a 65-year-old couple will need $215,000 to cover health-care expenses in retirement, including costs for Medicare Part B and Part D and supplemental insurance.  This amount does not include potential long-term-care expenses.  It was also estimated that a 65-year-old earning $60,000 in the year he/she retires could spend half of pretax Social Security benefits on health care (Source:  PlanSponsor.com, 2007).

•   Long-term inflation rates are uncertain.  Inflation has been tame for a long time, so it’s easy to underestimate its impact over a long retirement.  For instance, while inflation has averaged 2.54% over the past 10 years, it averaged 4.31% over the past 30 years (Source:  Bureau of Labor Statistics, 2007).  And while overall inflation has been tame lately, the items retirees spend a significant amount of income on, including health care, housing, energy, and food, tend to increase faster than overall inflation.

•   Plans for retirement have changed.  A common retirement planning rule of thumb is that you’ll need 70% to 80% of your preretirement income after retirement.  However, that guideline assumes a relatively inactive retirement lifestyle.  Increasingly, retirees view retirement as a time to travel extensively or engage in expensive new hobbies.  Thus, more and more retirees are finding little change in their income needs after retirement.

So how long will you have to work before you can retire?  Consider this fact.  Current retirees receive close to 70% of their retirement income from Social Security and defined-benefit pensions, while today’s workers will probably only receive one-third of their retirement income from those sources (Source:  Ibbotson Associates, 2007).  That means you’ll be responsible for saving enough to provide two-thirds of your retirement income.

For most people, that is no easy task.  It is typically recommended that no more than 4% of a retirement fund balance be withdrawn each year to ensure that funds last for a long retirement.  That means you need to save 25 times the amount you want to withdraw annually.  So, if you want $75,000 annually from your retirement assets, you need to accumulate $1,875,000 by retirement age.

On at least an intuitive level, most workers seem to understand what a challenge this presents.  More and more studies report higher and higher percentages of workers saying they plan to retire later or continue working in retirement.  There is some evidence that behavior is changing.  A recent study found that the percentage of individuals age 55 and older in the work force increased from 29.4% in 1993 to 38.0% in 2006.  The percentage of individuals from ages 65 to 69 in the labor force increased from 18.4% in 1985 to 29.0% in 2006 (Source:  EBRI Notes, August 2007).

If you are working, you’re not drawing down your retirement funds, and you can avoid taking early Social Security benefits at reduced levels.  You can also keep making contributions to your retirement savings.  Once you retire, you’ll spend fewer years in retirement, so your retirement funds will need to last for a shorter period.  Even if you decide to retire and only work on a part-time basis, those earnings can contribute substantially to your retirement lifestyle.

If you plan to keep working, how likely is it that you will be able to continue working?  One study estimates that 15% to 20% of people in their late 50s and 60s will not be able to work due to health reasons (Source:  Center for Retirement Research, March 2007).  This seems reasonable compared to data on current retirees.  A recent survey found that 22% of the respondents had been forced to retire an average of seven years earlier than expected.  While layoffs and corporate downsizing were the most often cited reasons for retiring early, other reasons included illness, injury, and family obligations.  Approximately 55% of those who retired early did so before they were eligible to receive Social Security benefits.  Most indicated that they were only able to save half of the amount they had wanted to save for retirement (Source:  Financial Advisor, January 2007).

Thus, even if you intend to keep working well past the age of 65, don’t use that as an excuse not to save significant sums for retirement.  You should start saving as much as possible, as soon as possible, for retirement.  Please call if you’d like to review your retirement plans.