Preparing for Derailed Plans to Work Longer

Whether it is to remain active or to supplement income, more individuals say they plan to work past the traditional retirement age of 65. Yet, research shows preretirees’ plans to work longer often fall short.

In “The Changing Nature of Retirement,” published by the Pension Research Council, Julia Coronado from Graham Capital Management, L.P.,  notes that the Retirement Confidence Survey (RCS) by the Employee Benefit Research Institute (EBRI) captures a steady increase in the expected age of retirement among current workers. In fact, the fraction of workers expecting to retire after age 65 has risen steadily from just over 10% in 1991, to roughly one-third of respondents in recent years (see “Retirement Expectations Are Changing”).  However, the RCS also shows that plans for a later retirement are not evident in the share of people retiring post-65 (about 15%).

Coronado also notes EBRI data finds a fairly large proportion of retirees exits the labor force earlier than planned, and this share has risen notably in recent years, such that nearly half of all retirees report early exit from the labor force. Reasons cited in the 2014 survey suggest adverse consequences for standards of living. For example, 61% cited health problems or disability, 22% noted work-related reasons including firm downsizing and closure, and 18% cited having to care for a family member.

Coronado contends this shows many people do a poor job planning for the many contingencies that end up affecting their ability to continue working at older ages.

According to the research paper, another data source, the Current Population Survey (CPS), confirms that older workers have experienced considerable unemployment and under-employment in recent years. For instance, older workers who lose their jobs face greater difficulty finding employment than comparably qualified, or even less-qualified, younger workers. “The implication is that workers must factor considerable uncertainty about their ability to work later in life into their planning process, rather than assume they can work as long as they want,” Coronado wrote.

The paper notes that older households were not immune to the leveraging that brought the U.S. economy to the brink of disaster in 2008 and 2009. Traditionally, one of the simplest retirement plans had been for homeowners to pay off their mortgages prior to retirement, thereby lowering their income needs without changing their standards of living, Coronado says. The share of households approaching or entering retirement age with mortgages was small and fairly stable through the late 1990s, but it jumped in the 2000s. For older workers, fixed mortgage obligations against falling home values likely impacted their ability to retire and downsize, Coronado speculates.

She concludes that saving and consumption decisions must acknowledge the possibility of economic downturns and unemployment, volatility in investment returns, and the vulnerabilities implied by entering retirement with fixed debt obligations. She offers some simple rules of thumb, including paying off the mortgage prior to retirement, having a year of disposable income in cash to navigate unanticipated unemployment, and defining a certain multiple of household income that should be saved to finance consumption spending, depending on one’s planned retirement age.

The paper can be downloaded from here following a free registration.