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The Early Retirement Dilemma: To Work Or Not To Work?
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The Early Retirement Dilemma: To Work Or Not To Work?

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The Early Retirement Dilemma: To Work Or Not To Work?

Many Americans on the cusp of retirement are caught between the devil and the deep blue sea. They have too little saved, but they can’t keep working full time as long as they might want—or need.

Retirement advice typically focuses on the savings end of this dilemma. Experts implore workers to stash away anything they can—typically up to 15% of their pay—in an employer-sponsored retirement plan or an individual retirement account (IRA) as soon as they start earning paychecks.

That admonition is less useful for older workers, who have much less time to benefit from compounding returns.

That brings us to the working part of the dilemma. Financial advisors often recommend older savers stay on the job as long as possible so they can keep earning a paycheck and delay starting Social Security benefits.

But many older workers face health problems, have a spouse or family member who needs their full-time attention or have been laid off. Many claim Social Security as early as possible—age 62—tying themselves to lower monthly payments and a potentially lower standard of living. Some think it’s their only option.

There’s a middle way, however, that’s worth considering: Work part time, and forget about your full-time, salaried position.

Why Do People Retire When They Do?

The choice of when to retire is often determined by forces greater than ourselves.

Take Covid-19, which has been particularly harmful for older Americans. The labor force participation rate for those older than 65 and not disabled dropped by almost 10% between February and October of 2020, according to the Bureau of Labor Statistics. Tens of thousands of seniors left the workforce and aren’t looking for new employment. Compare this to just over 2% of those between the ages of 24 and 54 who left the workforce over the same time period.

One such person, per CNBC Make It, was Doug Sheehan, who quit his job in the hotel industry at age 63, when the pandemic struck, to be close with his family. This was two years earlier than he had been planning to retire. Sheehan said the decision was costly, but ultimately he’s muddling along.

People like Sheehan make complicated decisions about their retirement all the time. In a 2018 Transamerica survey, for instance, one 65-year-old female respondent said she stopped working to care for her grandchildren so their mother could work. A man called it quits at age 63 because he could no longer stand the grind while a 70-year-old was laid off during a cutback.

All in all, about a third of respondents retired when they’d been planning to while 56% retired earlier than they’d envisioned. The other 10% or so are still working.

The Problem with Early Retirement

Looked at from a certain angle, this isn’t terrible news. People are free to choose what’s best for them, and maybe we have unrealistic expectations about how smooth a transition to retirement ought to be.

Where it gets tricky is how you plan to pay for the last quarter of your life. After all, a relatively healthy non-smoking 60-year-old can expect to live another 25 years or so on average. Do you really have enough saved for a quarter century of retirement?

Just 55% of households helmed by someone between the ages of 55 and 64 has a retirement account, according to the Federal Reserve, which is actually down from 64% in 2004. The average amount they have stashed away is just $134,000, hardly enough to replace a fraction of the average pre-retirement annual income for decades.

Most retirees depend on Social Security for about half of their household retirement income. Pensions and retirement savings account for 16% of retirement household income, and other savings constitute 6%. The remaining 25% of average retirement household earnings comes from work, either from the retiree or another member of the household.

But here’s the rub: Social Security payments get larger the longer you wait to begin receiving checks. In fact, the average benefit rises by about 8% each year you delay until payments become mandatory at age 70. By leaving the workforce earlier than planned and starting Social Security, you bake in lower payments from the very income stream you’ll depend on most.

Longer Full-Time Careers May Not Be Possible for All

The obvious solution to low savings—hold on to your full-time job as long as possible—may ring hollow to some.

A recent University of Wisconsin research paper looks into what would happen if the early retirement age were raised from 62 to 64. According to the paper, blue collar workers would respond by working a bit longer but also applying for disability insurance in greater numbers. That means many people may not be capable of working longer, due to the stresses of a taxing job. Today half of blue collar workers apply for Social Security as soon as possible. By increasing the early retirement age by two years, 65% of blue collar workers would retire at 64 while disability insurance usage would rise by six percentage points.

That suggests many people have the capacity to keep working, at least a bit longer, if they were properly incentivized.

Non-Traditional Jobs for Retirement Security

A new study from Boston College shows just how powerful such motivation can be.

Take someone who is between 61 and 62, is way behind on their savings and stops working. Rather than being able to replace almost three-quarters of their pre-retirement income with Social Security, savings and the like—the amount estimated they’ll need to maintain their same standard of living—they’ll only be able to replace half, making it challenging to get by in retirement.

But if that person took a job, even if it offered no benefits—a so-called nontraditional job—and worked for six years, they’d be able to retire with income that replaced nearly 70% of their pre-retirement income, largely thanks to delaying claiming Social Security.

That means a burnt out accountant, sick of the daily grind, could still call it quits. Instead of hoping everything works out for the best, they could take a part-time gig, perhaps closer to home and with less stress. Maybe they could try freelancing. In any event, they have more options than they might realize.

“Workers who do not feel capable of maintaining their career job, or who desire more flexibility and autonomy, can take heart that even a nontraditional job can bring them closer to their retirement goals,” suggests the Boston College study.

Some will simply not be able to do even that. But others might, and if you can, it’s an amazing opportunity to make up for years of lost savings. It can mean staying in your home rather than moving in with your children.

By putting in an extra few years, you can gain decades of financial freedom.

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