WELCOME BACK to our 3-part series on the benefits of working longer. Here we look at the financial advantages of staying in the workforce later-in-life.
Now we know that financial factors are exactly what drive most people to work longer and a lot of people probably read the first article and thought, “Working longer? I have no choice!” But no matter what your situation, it’s important to understand the present-day retirement reality and how working into retirement can have a HUGE financial impact.
This is not your parents’ retirement
You might be surprised to learn that retirement is a relatively new concept and only took hold in the US after the Great Depression. With the passage of the Social Security Act in 1935, the rise of defined benefit corporate pension plans, and a thriving economy throughout the mid-to-late 20th century, millions of Americans were, for the first time, able to enjoy a comfortable “retirement”. You know the stereotype: move to Florida, play shuffleboard, and live a carefree life – sounds great! But can Baby Boomers expect the same type of deal?
Unfortunately, the answer is largely “maybe”, due to a few trends that have been eating away at the easy retirement of yesteryear:
- Life expectancy. Baby Boomers are living longer than their parents and more years retired means more money required. Americans have gained 10 years of life expectancy in the last 20 years alone, and the average 65 years old will live to see their mid-80s.
- Defined contribution pensions. It used to be that when you paid into a company pension you were guaranteed a “defined benefit” (a regular check) when you retired. Nowadays these type of plans are out, and 401(k) plans are in. However, these plans are only “defined contribution” and don’t guarantee what you get out when you retire.
- Reduced personal savings and wealth. Wages have been largely stagnant since 1979 and home values haven’t risen above pre-financial-crisis levels. Less home equity and savings in IRAs and other assets means less money available in retirement.
With all these factors working against you, it’s easy to understand how retiring “on time” can be hard!
When a dollar is worth more than a dollar
Now that we’ve got the “doom and gloom” part out of the way (sorry), let’s look at how working longer can boost your late-life financial situation. First, it’s important to realize that while any income you earn in your 50s, 60s, and beyond will defer your dip into retirement savings or Social Security, you’ll actually gain more than just not spending one dollar now to have one dollar later. But how?
- Investment compounding. Any continued contributions to retirement accounts, plus delayed withdrawals of existing funds, will continue to compound and increase the money available to withdraw later.
- Social Security benefit increases. If you opt to take year benefits later than your full-eligibility age you’ll receive 8 percent more money each year until you hit 70
These two benefits accrue to anyone still working, whether you’re a freelancer, seasonal employee, or full-time, and they are powerful ways to supercharge your retirement funds even with only a couple extra years of work. If you stay in a full-time position there are even additional benefits. Earning matching contributions to your 401(k) and retaining employer health insurance coverage (at least until 65 for Medicare) can be huge windfalls as well. Looking at all these possible benefits, it’s easy to see how a few more years of work could be a huge boon to people in all sorts of financial situations.
The bottom line
No matter if you decide to work longer by choice, by necessity, or not at all, it’s important to recognize that working even a little bit longer can be have a substantial impact on your retirement finances. The impact is so powerful that a very recent study found that working even a single month longer has the same impact on your retirement standard of living as increasing how much you save for retirement by one percentage point 10 years before your retirement date. A single month!
So when you’re thinking about how the rest of your working life and retirement are going to play out, remember to think about the huge positive benefits later-life work can have on your standard of living and eventual retirement. After all, a little bit can go a long way!