Fifty percent of older Americans are delaying retirement, and for many, it’s not because they find work meaningful or enjoy the social and intellectual stimulation. It’s because they can’t afford to stop. The good news is that extending one’s working years has a profoundly positive effect on retirement readiness.
In InvestmentNews, Professors Jamie Hopkins and David Littell, of The American College of Financial Services, write: “The percentage of workers who would be financially prepared for retirement increases from 49 percent with a retirement age of 65, to 85 percent if the individual works five years longer and retires at 70.”
Even smaller delays in retirement help. In fact, retirement readiness increases by nearly 11 percent after just one additional year in the workplace. In some instances, part time work is sufficient to reduce or eliminate income gaps and improve quality of life.
A calculation showing the effect of retirement age on retirement readiness effectively illustrates the big difference working longer makes. Consider a 58-year-old single individual with $100,000 of income, $500,000 of assets, and a savings rate of 20 percent. This individual needs 85 percent of his income to live comfortably in retirement. If he retires at age 65, his income shortfall occurs at 82. If he retires at 66, his income shortfall occurs at age 88. But if he retires at 67 – just two years beyond his initial anticipated retirement date – his assets are sufficient to stretch to the age of 90. Clients may find it enlightening to see how changing the date of retirement impacts their retirement readiness. Online calculators such as this one are helpful and easy to use.
Working longer also is a creative way to mitigate other individual circumstances or goals. A client with low risk tolerance may elect to work longer to allow them to keep retirement investments in a lower risk – but also lower growth – asset allocation. Working longer can also help compensate when a client has inadequate savings, an underperforming portfolio, or simply was late in starting to save for retirement.
Unfortunately, most Americans are unaware of how useful it can be to delay retirement. The 2017 RICP® Retirement Income Literacy Survey reported 67 percent of Americans polled were unaware that working two years longer had a greater positive effect on their retirement readiness than increasing their savings rate in the years preceding retirement by 3 percent.
Every client’s case is different and retirement income planning exists in many dimensions, so it’s crucial for financial planners to consider all of a client’s options when developing a comprehensive plan. Retirement age is just one of many factors that should be part of this discussion. Housing, transportation, living expenses, medical expenses, and the client’s desired retirement lifestyle can also be reviewed.
Learn how to address income gaps and help clients achieve their retirement goals by becoming a Retirement Income Certified Professional® (RICP®). The RICP® designation prepares planners to develop comprehensive financial plans and help clients turn assets into income during their retirement years. This expertise focuses on transitioning from asset accumulation to creating a sustainable income for clients in retirement.
When investors work with an RICP®, they can be confident that their unique needs and challenges are addressed and that they are creating a retirement income plan that keeps them on track toward their goals. Learn more about the RICP® and how this designation leads to greater professional development and a more successful career as a financial planner.
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