The Money Class (28 page)

For those of you who fit any of these descriptions, I want to make sure you have a realistic game plan for how you will leverage working longer into a secure retirement. I realize that many of you may in fact
want
to work longer, for reasons that have nothing to do with finances; you want to stay engaged in work for the sense of satisfaction and vitality it provides. I think that’s great. But my lesson on delaying retirement and working longer is focused on those of you who
need
to work longer.

Frankly, I am concerned that many of you may be heading for big trouble by overestimating your ability to work longer. As much as I believe that we should all plan to work longer, we also must keep saving, and saving aggressively, today in case we cannot continue to work as long as we might like.

According to the nonpartisan Employee Benefit Research Institute, more than 40% of workers today say they expect to work past age 66—nearly double the percentage that said the same in 2000. But the reality is that 40% of people end up retiring before they expect to; the most common reasons are poor health or being laid off. It’s also interesting to see that while 70% of workers near retirement today say they intend to work in some capacity after they retire, the data shows that in fact just 23% of current retirees continue to work. I mention all of that because it is important to recognize that even if your intention is that you will work longer, you must also plan for the possibility that you may not be able to.

DOWNSIZING TO A LOWER-PAYING JOB IS A FACT OF LIFE

Even if you do keep working through your 60s, it is dangerous to assume you will be working in the same high-powered job that paid you a top salary in your 50s. Downsizing is a fact of life we all must be prepared for. And if you have been with one firm for a long time, there’s a good chance that a new job in your 50s or 60s will not pay as well. And let’s be sure to stand in another important truth: Working 40, 50, 60 hours a week in your 60s may not be something you want to do. Sure, you want to work, but at a less hectic pace. You may make less in your 60s because you choose to shift to a less demanding job. A 2008 study by the Center for Retirement Research (CRR) at Boston College found that the percentage of men between the ages of 58 and 62 who were still with the same employer they worked for at age 50 had dropped from 68% in 1983 to 46% in 2006. And that was even before the economic downturn in 2008 left so many across all age brackets unemployed. Moreover, the CRR also found that those who changed jobs after age 50—whether the switch was voluntary or not—made on average about 25% less in their new job.

Add up all those factors and the lesson here is that you cannot assume you will be able to maintain the same pay and same vigorous work schedule that you kept in your prime. You must aggressively save for retirement in your 50s so that you can afford to earn less in your 60s, and if necessary, stop working altogether at an earlier-than-expected age.

Yet here’s what I hear so often these days from so many of you: Your plan, you say, is to never retire. I have to tell you, that is simply not a realistic plan. Please do not make the mistake of not saving for retirement (or not saving as much as you can) on the assumption you will be able to work forever—even if that’s what you want.

YOUR WORK-LONGER GAME PLAN

•
Plan on making less in your 60s than you did in your 50s
. Maybe this won’t come to pass, but now is the time to do as much saving as you can so in the event you can’t work as long as you expect, or you take a lower-paying job, your retirement plans won’t be thrown off course. That’s another reason why I recommend paying off your mortgage sooner rather than later; if you are still saddled with a hefty mortgage payment in your early 70s or 80s you are walking quite a financial high wire.

•
Aim to delay your retirement until age 66 or 67
. When it comes to Social Security, your goal should be to wait until you reach at least your full retirement age (FRA) so you can claim your full retirement benefit. While your grandparents’ FRA was 65, the system was tweaked in the early 1980s to gradually raise the FRA. Anyone born between 1954 and 1959 has an FRA between age 66 and 67; it depends on the exact year you were born. For example, someone born in 1957 has an FRA of 66 years and 6 months, while someone born in 1959 has an FRA of 66 years and 10 months. Everyone born in 1960 and later has an FRA of 67.

A Note About Potential Social Security Reform

In 2010, as our government began to debate possible fiscal reforms to address the national debt and deficit, raising the FRA for Social Security was one of the options thrown into the conversation. Please understand that none of the current proposals—and they are just that, proposals that have yet to garner any momentum—would change the age requirements for people already in their 50s. One proposal to raise the FRA to 69 would impact today’s toddlers, not you.

I’d love for you to keep working until you reach your FRA, if possible, so you don’t feel tempted to draw your Social Security benefit beginning at age 62. As I will explain in the next lesson, delaying your Social Security start date is a great strategy to give you more income in retirement. And trust me, most of you will need it.

Delaying your retirement just 3 to 4 years—or more if you’re willing and able—can have a tremendous impact on your retirement security. It reduces the number of years you will be living off your retirement income and allows your investments to continue to grow. So often the “How Am I Doing?” segment on my CNBC show involves a couple who want to retire in their early 60s and seek my opinion. In the vast majority of these calls my advice is to keep working. Here’s what they and you need to understand: According to research by T. Rowe Price, if you retire at age 67 rather than 62 you could have nearly 40% more retirement income, and that assumes that from age 62 to age 67 you don’t save a penny more for retirement. Delay retirement all the way to age 70—again assuming you stop saving at age 62—and your retirement income can be more than 60% higher than what you would have if you retired at age 62. The big increase is a function of your savings continuing to grow a bit longer, the fact that you will be living off your retirement savings for fewer years, as well as the benefit of waiting to take your Social Security payout at a later age. (We will cover this important step in the next lesson.)

•
Spend your 50s planning for your 60s
. Waking up at age 62 laid off or sick of your job is not the ideal time to think about what you might do to bridge the gap to age 66 or 67. You want to be planning for that day at least a decade before. If your dream is to transform a hobby into a part-time job that will bring in some income during those transition years, you need to start testing the waters and picking up any necessary new skills you may need. Or if you want to do something entirely different that requires formal training, get that schooling now, before you need it. In fact, if your employer offers education benefits, have your company help you pay for your next-stage career. If you anticipate you will want to segue into a consulting role in your area of expertise, well, now is the time to start doing a little bit of that on the side (assuming your employer has no objections), or focusing on building industry relationships that will make it easier to bring on clients when you do start your consulting work.

I also recommend you make an effort to develop relationships with the 20- and 30-somethings in your office and at industry networking events. Those are the folks who 10 to 15 years from now will be running the show when you are looking for a late-career job in your 60s.

LESSON 3.
DELAY YOUR SOCIAL SECURITY BENEFIT

Nearly two-thirds of Americans rely on Social Security retirement benefits as their primary source of retirement income. Yet most Americans settle for a Social Security benefit that can be 30% to nearly 80% less than what they are entitled to because they choose to start receiving their benefit at an early age.

For our parents and grandparents, Social Security was a no-brainer—the benefit started to kick in and subsidized their retirement. But for baby boomers who are suddenly staring down retirement, it is a whole new ball game and it is so very important to learn the ins and outs of how Social Security works. And learning about this in your 50s is very important. If you decide that waiting until age 66 or 67 to begin your Social Security payments makes the most financial sense, that may impact other decisions, such as whether you will want to keep working—even if just part-time—until the time is right for you to start drawing your Social Security benefits.

I want to call attention to the fact that this is a whole new strategy I am presenting here, different from what I’ve written about in my previous books
.

Changes in the economy and our retirement system necessitate this shift. For example, most of you will not have a steady pension to rely on in retirement; that ratchets up the need to be as strategic as possible in how you take your Social Security benefits. Moreover, taking early benefits used to mean a maximum 3 years of early benefits, as past generations had an FRA of age 65. Today the FRA for people currently in their 40s and 50s is somewhere between the ages of 66 and 67. That stretches the period—and the penalty—for early benefits from 3 years to as much as 5, and thus it changes the calculus of this important decision. Social Security to our parents and grandparents was a cornerstone of the American Dream. For my generation and the generations that follow, Social Security is still a part of the American Dream of retirement, but because you may not have that steady pension, or because you may not have been able to save up enough on your own through your 401(k) and IRA, squeezing the absolute maximum amount from Social Security becomes one of your most important retirement planning strategies.

The time to learn how best to take your Social Security benefits is right now, when you are still young enough to be able to adapt.

SOCIAL SECURITY BASICS

We are all eligible to begin receiving our Social Security retirement benefit at age 62. But what you may not fully appreciate is that the Social Security program will give you a higher benefit for every month you wait to start, between the age of 62 and age 70.

The payment scale pivots around your full retirement age. As I explained above, the FRA for today’s worker is somewhere between age 66 and 67; everyone born after 1959 has an FRA of 67.

If your FRA is 67, that is the age at which starting to draw your benefit will entitle you to 100% of what you have earned. If, however, you decide to start drawing an early benefit at age 62, it would be just 70% of your full benefit. In other words, when you start your benefit at age 62 you are locking in a 30% reduction compared to what you could earn if you waited a few years. Another way to look at this is that between the age of 62 and 67 Social Security will pay you 6% a year if you delay starting your benefit payments.

Even if you were to take the money early with the intention of saving it for your later retirement years, I think you’d be making a mistake. That 6% bonus each year is guaranteed. There is no way you could be absolutely assured your investments would generate that return. Maybe yes, maybe no. But either way you would have to invest in far riskier investments than what you can get guaranteed by delaying when you start to draw your Social Security benefit.

But that’s not all. Let’s say you reach age 67 and you are still happy to be working, or you have enough retirement savings you can rely on, so you don’t need to begin receiving your Social Security payout. The Social Security Administration will pay you an 8% bonus for every year between the ages of 67 and 70 that you continue to defer your start date. That is, if you wait until age 70 to begin receiving your Social Security benefit it will be 124% of the benefit you would be eligible to receive if you started at age 67 and about 80% more than the benefit you would be entitled to at age 62.

There is indeed talk of “reforming” Social Security to help address our fiscal shortfalls, but there is no proposal being discussed that would alter the benefit formula for Americans who are already in their 50s; any changes would be slowly phased in over many years; they may impact your kids and their kids, but not you. And as I explained in the previous retirement class, Social Security is not going belly-up. The reality is that beginning in 2037, Social Security will not have enough money to pay 100% of the current benefits; it would be able to pay out at about 75% of its current promised benefit level. I am not suggesting that a 25% reduction is “nothing,” but it is also far different than no payment at all. And in fact, if and when Washington chooses to look seriously at fixes, there are some reasonable ways to tweak the system that would keep the program on solid footing well past 2037.

How Your Start Date Affects Your Social Security Payout

•
Benefit at age 62:
70%

•
Benefit at FRA
^*
: 100%

•
Benefit at age 70:
124%

*
Assumes FRA of 67

It is also important to understand that Social Security benefits are indexed to inflation; every year there is inflation, your benefit will be adjusted higher.

So how come the Social Security Administration is so generous if you delay? Well, it’s nothing more than some actuarial math at work; the older you start, the less time, on average, you will collect that benefit. So the program can afford to pay you more.

That raises an important question I imagine you’re pondering right now: If you die before you reach age 67 or age 70, won’t you have “wasted” all that money you didn’t ever get because you waited? Or what if you don’t start to draw your benefit until age 70 and then you die at age 73? Won’t you have left a lot of money on the table?