For many Americans quickly approaching retirement, the question of whether or not to continue to work is a big one—possibly the biggest. That decision not only affects other decisions you make about your retirement, it can also drastically impact your finances and lifestyle, which in turn could affect other family members.
More than one-third of Americans predict they will work into retirement. A 2016 Federal Reserve survey found that 38 percent of respondents plan to keep working into retirement and 42 percent of those plan to work past age 70 or expect to never retire. Even those with substantial investment portfolios may need or want to work, at least for the first few years of “official retirement.”1
That’s not necessarily a bad thing: Continuing to work, even part-time or for just a few years, can have a positive impact on your long-term and short-term financial, and even physical, health.
Although it may seem counterintuitive—retirement is defined as the end of work—considering the will-I-work-in-retirement angle is an important first step to crafting a realistic retirement plan. But the decision to work, especially for how long and in what capacity, is a complex component to your overall financial plan.
To Work or Not to Work: What the Decision Means for Your Retirement Income
Retirement is not cut and dry. Fewer and fewer people work until they’re 65 and then get a “Best Wishes” cake and a send-off party from their co-workers. You may work longer than that, change job functions, work part-time or consult. Consider some of the main ways work could impact your retirement plan:
- Social Security. One of the main reasons many people choose to continue working is the way Social Security benefits are structured. While you may start drawing benefits at 62, the monthly amount you receive increases each year you delay taking the benefits available to you.
“Here’s a little retirement income trivia for you,” says Steven A. Sass, an economic researcher at Boston College’s Center for Retirement Research. “How much higher are your benefits if you delay taking them from 62 to 70, the earliest to the latest?”
“There’s a 76 percent increase,” Sass says.2 “That’s jaw-dropping. A lot of people think there’s not a lot they can do to increase retirement income, but that’s a pretty big increase.”
While not everyone will see that exact increase, it is indicative of the difference delaying retirement can have. It’s not just a few dollars—it can be hundreds of dollars each month. And while you do not have to work in order to delay taking Social Security, many retirees will opt to make up that income somehow.
- Budgeting and expenses: Keeping a close eye on where your money is going is especially important when retirement is just five years away. Tracking your expenses carefully will give you a more realistic understanding of what your budget will need to look like and therefore how much longer you may need to work, as well as what costs are associated with working.
More importantly, spending less and saving more has the dual benefit of adding more money into your retirement savings while moving to a more sustainable standard of living, and the reduction in the amount you need to live on in the future is the bigger effect—it’s much greater than the increased income you can get from the addition to your saving, Sass says.
- Determining post-retirement income: The basic rule of thumb is that 70 to 80 percent of your pre-retirement income should be replaced by your Social Security, pensions, annuities, investments, IRAs and/or savings. However, many retirees are often only prepared to replace about 60 percent of their pre-retirement income.3 That leaves a gap where additional income could make a big difference.
- Pensions and related income: There may be options to delay disbursement if continuing to work can reduce the demand for that income. Couples must address issues of survivorship, estate planning, taxes and investment returns when they plan to begin distribution of pensions and annuities. That planning should be well underway if retirement is only five years out.
- Housing: “For most people, their home is both their biggest store of savings and biggest expense,” Sass says. What you do with your home in retirement is also a major decision and one impacted by your decision to work. Many retirees consider downsizing—an excellent way to reduce expenses and increase available savings, Sass says. He recommends downsizing early, as it’s easier both socially and physically. Downsizing also helps you reap the benefits of savings over a longer period of time. If you are still working, however, that may limit where and how you downsize.
- Risk tolerance: An advisor is critical to help with asset allocation and financial preparation for retirement, because as you leave the workforce or reduce your participation, your ability to tolerate financial setbacks diminishes. An advisor can help you figure out what kind of savings you need to comfortably survive certain life events, such as a major illness.
There are more than mere financial reasons to continue working in some capacity during retirement. “One of the things you have to consider is, what are you going to do to give yourself a sense of identity and a sense of purpose in retirement—volunteering, reading, learning things,” Sass says. “It’s kind of hard to replace a lot of the personal activities and goals that everyone has when working.”
What Kind of Post-retirement Work Is Right for You?
Just because you continue to work in retirement doesn’t mean you have to show up at the same job everyday indefinitely. Experts call this “bridge employment,” which can be a part-time job, self-employment or even working in a reduced capacity for your current employer.
Research suggests that working in your field may actually lead to a happier retirement than working in another field or not working at all.4
Healthcare and Retirement
Retirees who continue to work in some capacity typically enjoy better health than those who choose not to work at all. A 2015 Harvard Medical School study found a compelling link between work and health: Those still working past age 65 were about three times more likely to report being in good health compared with those who had retired completely.5 Research also suggests that working even a year past 65 lowers the risk of death from all causes by nearly 11 percent.6
Regardless, it’s important to consider how you will pay for your health needs during retirement. You are eligible for Medicare starting at age 65 whether you work or not. However, it’s important to take a look at what’s covered under Medicare and whether you may need supplemental coverage to meet your needs.
Also keep in mind that you must sign up for Medicare Part B within seven months of turning 65, or you may incur a late penalty. You can delay signing up if you are still covered by health insurance provided by an employer and will instead be eligible for an eight-month special enrollment period when you are no longer covered. However, exceptions apply so it’s important to closely review the enrollment rules with an advisor.7
Beyond the basics of Medicare, you may also want to look into long-term care insurance to address the cost of certain personal care services that are not addressed by Medicare or other private health insurance. For clients who might not qualify medically for long-term care insurance, Sass recommends considering buying a deferred annuity that wouldn’t pay out until your mid-80s as a means of mitigating longevity risk and helping pay for long-term care. A deferred annuity also makes the task of drawing an income out of a pile of savings much easier.
Changing Portfolio Needs
As your timeline toward retirement shrinks, your investment portfolio needs may change. The basic recommendation is to get more conservative with your investments as you near retirement, Sass says. The main reason: You can’t respond as well to risk if you don’t have sufficient savings to cushion a fall in the market. However, to the extent that you can continue to work, should the market fall, you would not need to make as large a change to your investment strategy.
“A lot of people don’t mind working,” Sass says. “You might get tired of this or that aspect, so you don’t have to keep your same job. But finding another way to earn an income while you let your retirement assets grow, which will increase your retirement income about 7 or 8 percent each year, can make a big difference.”