1: It literally pays to work, and MONEY can buy peace of mind
When he took an early buyout in 1998, ending his 30-year marketing career, Don Vellek could easily have retired for good. The stock market, after all, was raging at the time. Vellek had enough money to live comfortably, following the buyout. And retiring early was the holy grail of baby boomers in the late '90s.
But Vellek chose to keep working. He had co-owned a travel agency for years as a side venture, and the Atlanta resident decided that his retirement from corporate America offered him the perfect opportunity to run that small business full time.
Then two years ago, Vellek sold his company, presenting him with yet another chance to retire. But again, he chose to keep working. He agreed to stay on at his old firm, where he is now a travel agent for the company that bought him out. "The way I figure it, it's kind of like momentum," says Vellek, now 59. "Things are rolling along quite nicely, so why would I want to give this up?"
It's a question more and more older workers are asking themselves today. While it was fashionable to retire early in the late '90s, and while it may have been necessary to retire later than expected in the aftermath of the subsequent bear market, older workers today are voluntarily--and happily--working longer. And there isn't likely to be an end in sight to the trend, with 77 million baby boomers nearing retirement age.
Unretirement. As strange as it sounds, nearly a quarter of older workers who describe themselves as "retired" are still working, either full time or part time. The typical self-described working retiree puts in around 20 hours a week. And many say working longer pays them big dividends--financial, emotional, or both. No wonder two thirds of American workers "now think they will work in some capacity in retirement," says Michael Falcon, who heads Merrill Lynch's retirement group.
To be sure, some retirees plan to keep working for the cash. After all, a majority of workers age 55 or older have less than $50,000 saved for retirement. But this trend is based less on dollars and more on the sensibilities of today's older workers. Workers once looked forward to rest and recreation at the end of a long career. But today, the vast majority of 60-somethings who want to keep working say their chief reason is to stay physically and mentally active.
These are people like Gregory Czubik. The 59-year-old was offered an early retirement package from his auto-industry employer last year. But the Kingwood, Texas, resident turned it down, he says, "because I feel like I can still contribute."
For Vellek, a self-described foodie and wine lover, working at a travel agency has unique benefits, including access to attractive travel packages that ordinary retirees would never learn of. Plus, he can tap into his long-term relationships with cruise lines and hotels around the world. "The perks of working are really terrific."
Of course, the financial perks are also considerable. A big reason it pays to remain on the job is that work literally pays. No matter how small the income your job generates, it will help stretch your resources to fund a longer--and probably better--retirement. "Even a couple of years can make a huge difference," says Patricia Brennan, president of Key Financial, a planning firm in West Chester, Pa. Glenn Kautt, president of the Monitor Group, a wealth management firm in McLean, Va., says that "it's like a 2-to-1 factor." For every additional year or so of work, he says, you can extend your nest egg by two years.
How is this possible?
Working longer gives you more time to save. If you keep working for even two additional years, that's two more years to sock away money into your retirement accounts. Remember, Uncle Sam allows workers 50 and older to make catch-up contributions to their 401(k)'s and individual retirement accounts--for a total of up to $20,000 and $5,000, respectively, this year. Max out on both for two more years, and that's $50,000 of extra tax-sheltered savings. Since retirement can easily last two decades or longer, that $50,000, if properly invested, could grow to nearly $200,000 by the time you really need it.
You can delay taxes. Withdrawals from your 401(k) or a traditional deductible IRA will be taxed as ordinary income. But if you work longer than expected, "you won't need to pull that money out of your account, and that means you won't need to pay taxes on those withdrawals just yet," says Brennan. Meanwhile, the money left in your 401(k)'s and IRAs will grow--and compound--tax deferred for several more years.
You can delay tapping Social Security. By waiting until after your "normal" retirement age (which is 66 for most boomers and 67 for those born in 1960 or later), "you can boost your payments by as much as 50 percent" versus someone who taps his benefits early, says Chris Raham, senior actuarial adviser at Ernst & Young. Recently, the employee benefit consultant Hewitt Associates studied the retirement savings of workers at some of the nation's biggest corporations. By Hewitt's calculations, older boomers were on track to replace 79.8 percent of their working income through pensions, 401(k)'s, and Social Security. That's assuming they retire at 65. But by working just two more years, they'd be on track to replace nearly 93 percent, in part thanks to bigger Social Security checks.
Working longer shortens your retirement. Life is a zero-sum game. Extend your working career, and you automatically shorten the length of your retirement. And "the less time you're going to be pulling money out, the less money you'll need," says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research.
You can reduce your withdrawal rate in retirement. The biggest reason retirees run out of money, studies show, is that they overestimate how much they can safely withdraw each year. Based on historic investment returns, typical retirees should withdraw no more than 4 to 5 percent annually, if they want their money to last for more than 25 years.
The problem is, to generate even $40,000 a year in retirement income, you'll need to have $1 million saved up. But if you were to earn, say, $20,000 a year, you'd need to pull only $20,000 from retirement accounts to produce that $40,000 in total income. So, you could manage with savings of $500,000.
You can maintain your healthcare coverage. A main reason that General Motors employee Larry Crager turned down a $140,000 buyout package is that the offer would have cut off retiree medical coverage. "My wife is self-employed--she owns a small flower shop--and she relies on my healthcare coverage," says Crager, 49, of Shelby Township, Mich. "It's a huge issue for us." Crager figures it may cost his family well over $140,000 to pay for healthcare coverage for the rest of their lives. He's probably right. Fidelity Investments recently reported that a 65-year-old couple retiring today would need some $200,000 in extra savings to cover basic medical costs.
Working longer gives you greater flexibility. The most overlooked benefit of working later in life is the financial flexibility it offers. This can be a huge benefit for boomers, who not only are living longer these days but face competing financial obligations. Many boomers have had children later in life than their parents did, so some are redirecting retirement money to pay college tuition. A few extra years of work can certainly help restock those retirement accounts. What's more, many boomers have seen those kids come home to live after college. Since the start of this decade, the number of adult children living with Mom or Dad has jumped 70 percent. This adds an extra financial burden to workers when they need it the least.
Perhaps the biggest reason it pays to work longer is that staying in the workforce helps you better time an appropriate exit. If you don't believe timing matters, "just ask the last wave of retirees who left the workforce in the bear market," says Ivory Johnson, director of financial planning at the Scarborough Group. Consider: If you retired during the down market of 2002 with $500,000 in your nest egg, and you withdrew 7 percent of your 401(k) and IRAs to cover basic living expenses, you would have been left with only around $360,000 by the start of your second year of retirement in 2003. But had you waited two years for the market to recover and grow, and then withdrawn 7 percent of your account in 2005, you'd have had more than $542,000 in your account by your second year.
The bottom line: The first few years of retirement are the most critical in preserving your nest egg. Yet the only way individuals can truly safeguard their savings is to be willing to work through choppy times in the investment markets. The good news is, many older workers today are more than happy to do just that.
This story appears in the June 12, 2006 print edition of U.S. News & World Report.