Working longer is the advice most naturally given to someone who is behind on their retirement savings, and it makes a certain amount of sense. People today are living longer anyway, and there is a two-for-one retirement-savings benefit to working longer - for each extra year you work, you give yourself another year to catch up on retirement saving while also reducing by one year the length of the retirement you'll have to fund.
However, it's not a universal solution to retirement-funding shortfalls. Working longer often just doesn't pan out for a variety of reasons.
Why working longer may not work
A survey by the Employee Benefit Research Institute found that, while 34 percent of all active employees intend to continue working into their 70s, only 6 percent of workers last that long before retiring. Fully 43 percent of workers retire earlier than planned, compared with just 9 percent who work longer than they originally intended.
For many, then, simply intending to work longer does not prove to be a viable way to catch up on retirement saving. The reality is that your retirement age may be closer than you think.
Here are some reasons why so many workers end up retiring sooner than they planned:
- Mandatory retirement ages still exist in some situations
Age-discrimination rules have outlawed mandatory retirement ages in many, but not all, situations. They may still apply to certain jobs that have physical requirements or even for certain levels of executive responsibility.
- Financial incentives may phase out older workers
Older workers who have been climbing the wage ladder for many years are generally more expensive than younger workers. Also, if your employer has a defined-benefit pension, your future benefits may become more expensive to your employer the longer you stay on the job.
- Job requirements become too demanding
From physical exertion to new technology, it can be very difficult to keep up with the demands of a job indefinitely.
Reality check: Will you be able to catch up on retirement saving?
If you are a little behind on retirement saving and assume you can work a few extra years to catch up, here are some questions you should ask now to check how realistic that plan is:
1. Does your employer have a mandatory retirement age?
For most jobs, the answer should be no. Still, there are exceptions; so it is best not to assume that's the case only to find out you will not be allowed to work as long as you had planned.
2. How long will you be up for the job, physically?
If your job is physically demanding, don't be in denial about how long you would be able to continue on with it. Feeling great at 60 doesn't mean you'll feel nearly as robust at 65. Look around to see how many older people are able to do your job. If they are few and far between, you are taking a risk by assuming you would be an exception.
3. Are your skills current?
Keeping up with the demands of your job entails more than its physical requirements. As technology and business practices change, it is important to stay current if you want to extend your career.
4. Can you prove you still meet your job's defined goals?
Subjective judgments may be more vulnerable to stereotypes about age and performance. If you have clearly measurable goals that you can demonstrate you still meet, you are more likely to be viewed as a valuable contributor later in your career.
5. Does the firm hire youth over experience?
See what cultural signals your employer's hiring and promotion practices send about how accepting they are of older workers. They may not be able to officially make you retire at a certain age, but some organizations make it easier than others to continue on in your career as you get older.
6. Is there a defined-benefit pension or a defined-contribution retirement plan?
If your employer has a defined-benefit pension, just be aware that career longevity may be viewed as a growing future liability. This is especially true if the firm has higher benefits based on tenure and/or a final-pay formula for computing benefits. Defined-contribution retirement plans, like 401(k) plans, are more neutral to longevity from the standpoint of employer cost.
However long you are able to work, your ability to catch up on retirement saving depends greatly on making the most of the years your career has left. Try to contribute up to the limits for IRAs or 401(k) plans and, if possible, take full advantage of catch-up contributions available to people aged 50 and over. Kicking your retirement saving up to full throttle may be a more viable plan than expecting to keep working enough years to make up for lost time.
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