A few more years on job pays off at retirement

PERSONAL FINANCE

August 06, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

When workers hear they will have to stay on the job longer than today's retirees, many imagine populating a cubicle into their 80s or 90s.

But some retirement specialists say workers may really only need to put in an extra couple of years, not an extra couple of decades.

Today, the typical retirement age is 63 for men and 62 for women. Continuing to work until 65 can make a big difference in the standard of living of future retirees, said Alicia H. Munnell, director for the Center for Retirement Research at Boston College.

"You have to work longer," Munnell said. "The important point here is we're talking a few years, not until your 90s."

Social Security is the reason that the early 60s became the standard retirement age, experts say. Workers become eligible for early - but reduced - monthly benefits at 62. Thus, a retirement trend was born.

By staying on the job two or so years longer, workers delay cracking open nest eggs. They can continue sticking more money into a 401(k) and receiving an employer match. They won't have to tap Social Security benefits early. They will have fewer years of retirement to finance.

Additionally, they can remain on an employer's insurance plan instead of having to pay this large expense out of pocket until Medicare kicks in at 65. And it gives them more time to pay down debt that can be a substantial drag in retirement.

Financial planners say they often encourage clients to work longer. But clients sometimes are only convinced of that wisdom when they see on paper what an extra year or so at work can mean to their lifestyle in retirement.

If you're unsure what difference a couple of years can make, here are the numbers:

Social Security today replaces about 34 percent of the typical 63-year-old's pre-retirement income, Munnell said. By 2030, that's projected to shrink to about 25 percent under current law. That's without any tinkering by politicians to shore up the system's long-term finances.

Several factors are to blame. Medicare premiums, which are deducted from Social Security checks before retirees receive them, are expected to climb significantly.

More retirees will be taxed on benefits in the future.

And the biggest factor is the gradual rise from age 65 to 67 to qualify for full benefits.

Those who take early benefits get a reduced monthly benefit for life. As the age to get full benefits goes up, the monthly check for those taking early benefits will go down, Munnell said.

To make up this reduction in benefits, Munnell calculated, workers with a 401(k) or other retirement assets would need to work about an additional two years - or until 65.

This calculation is based on a worker earning $40,000 a year with $100,000 in retirement assets. It also assumes retirement assets are left alone to continue to grow and there are fewer years of retirement to finance.

Workers with no money set aside in retirement accounts will need to work an extra 3 1/2 years to make up the reduction in Social Security benefits, Munnell said.

It's common to hear younger workers say Social Security won't be there for them. While the system might be changed, Social Security won't disappear and will still be an important safety net for future retirees, retirement experts predict.

T. Rowe Price Associates also has calculated the impact on savings of working longer.

About withdrawals

To lower the chances of outliving a nest egg during a 30-year retirement, Price recommends that retirees withdraw 4 percent of savings in the first year, and thereafter increase the dollar amount of withdrawals by 3 percent a year to keep up with inflation.

This amount is often far less than workers had been counting on, and many end up working longer to build up savings, said Stuart Ritter, a Price financial planner.

"It's not that you have to work forever," Ritter added.

By postponing retirement by one year and letting savings grow, you can increase the dollar amount of your withdrawal by 13 percent, according to Price's calculations. So, instead of withdrawing, say, $20,000 the first year from savings, you would be able to take out $22,600.

An extra two years

Work an extra two years, and the initial annual withdrawal rises by 28 percent to $25,600. Work six years longer, and the figure more than doubles to $41,800.

(Among the assumptions here is that you continue to save 15 percent of pay each year, earn an annual return of 8 percent while working and 6 percent while retired for 30 years.)

Some financial planners say another motivation to staying in the work force is to eliminate debt, including the mortgage, car loan and credit cards. Not having to shell out $1,000 or more each month can make a big difference in a retiree's lifestyle.

"There is nothing in this world that feels more comfortable than having no debt," said Jim Klima, a financial planner in Columbia. He makes it a rule with clients that they can't retire until their debt is retired. Most of them reach that goal, he said.

Of course, even if workers intend to stay on the job until 65, plans can go awry. Poor health can sideline workers. Older employees who are laid off might not be able to land another position. Or, workers hate their job or the boss and don't want to stick it out any longer.

Retirement experts encourage people to work at least part-time if possible when a full-time job disappears. Part-time employment can make a difference if it prevents you from dipping into savings.

"Every little bit helps," Price's Ritter said.

eileen.ambrose@baltsun.com

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