It's still early in the new year, a good time for aging boomers to review their retirement savings. (Boy, do we know how to have fun or what?) But if that’s your primary focus for retirement planning, I think you need to rethink things.
That’s because the new retirement planning mantra is: Get an encore job, network and delay filing for Social Security benefits.
Disappointing Retirement Funds
For many of us boomers, poring over our retirement account statements is a discouraging exercise. The kitty may be slightly fuller than it was during the 2008 global financial meltdown, but the sum still seems pretty paltry.
(MORE: It’s Time for a Retirement Reality Check)
The median balance in 401(k)s and IRAs for households approaching retirement is $120,000, according to the Federal Reserve's 2010 Survey of Consumer Finances. That would provide only $575 in monthly income, assuming a couple purchased a joint-and-survivor annuity, calculates Alicia Munnell, director of the Center for Retirement Research at Boston College. (An annuity provides income for life and a joint-and-survivor clause means the payout continues until both spouses are dead.)
Over the past three decades, the baby boom generation has been taught to equate planning for retirement with savvy investing. In essence, the retirement mantra has been: Stocks for the long haul, asset allocation and mutual funds.
The Core of Retirement Planning Today
But deep down, we’ve always known we couldn’t rely on Wall Street’s lush promises of investment returns. It took two bear markets and two recessions in less than a decade for boomers to realize what many had sensed all along: The core of retirement planning isn’t investing, it’s what kind of work you’d like to do as you get older.
Earning a paycheck in retirement offers a number of financial advantages.
For one thing, assuming you’re among the 99 percent of income-earners, what you’ll make at work (including temp jobs and short-term contract jobs) will dwarf whatever you might earn from investments.
(MORE: How Long Will You Need to Keep Working?)
For another, continuing to bring home an income lets you defer tapping into your tax-sheltered retirement savings. As a result, your money will compound for a longer period and need to last for fewer years.
“You should be looking for the kind of jobs you could do that are challenging, interesting and offer an acceptable income,” says Arthur Koff, the septuagenarian founder of Retired Brains, an online portal for retirees and near-retirees. “The time to do this is while you’re working full-time.”
How Delaying Social Security Helps
A paycheck in retirement also makes it practical to delay filing for Social Security benefits. That’s one of the savviest financial moves you can make, since, as Next Avenue has explained, the size of your checks goes up smartly for every year you wait to file after age 62 up to age 70. (There’s no extra bonus past 70.)
For instance, your Social Security benefits are increased by 6 percent for each year you delay claiming benefits from age 62 to 66. From ages 66 to 70 you’ll earn an extra 8 percent annually. Think you can match these returns by investing in stock and bonds?
The impact of waiting to take Social Security is especially powerful for older, low-wage employees.
The typical worker with an average salary of $30,000 can nearly double his or her annual retirement income from Social Security by staying on the job until age 70 rather than opting to retire and collect benefits at 62, says Eugene Steuerle, senior fellow at the Urban Institute.
When the Earnings Test Kicks In
Even if you claim Social Security starting at 62, you’re allowed to earn quite a bit of employment income before the government snips the size of your benefits because of what’s called the “earnings test.” If you claim Social Security before the “normal retirement age” (between 65 and 67, depending on when you were born), $1 will be deducted from your benefits for every $2 you earn above the annual limit, which is $15,120 in 2013.
Bringing in an additional $15,000 or so can be a big help for anyone under pressure to supplement income.
(MORE: 10 Secrets to a Successful Retirement)
Working Longer Isn’t Always Possible
That said, not everyone can work into their 60s and 70s.
Many jobs are physically debilitating, as anyone knows who has worked on a factory floor, operated a checkout counter or made hotel room beds. Laid-off workers in their late 50s and early 60s often find that employers have little interest in hiring someone their age.
How to Start Your Research
The advice to work longer, if you can, means it pays to invest in your human capital by maintaining your skills or picking up some new ones and perhaps going back to school.
So this is a good time to start researching your future job options, from hiring a career coach or meeting with temp agencies to picking up a book like Marci Alboher’s excellent The Encore Career Handbook: How to Make a Living and a Difference in the Second Half of Life.
Most important, invest in your network of family, friends, colleagues and acquaintances. Scholars have documented that, these days, about half or more of all hiring comes through referrals and networking with your connections. As career coach Carol Ross just wrote on Next Avenue, you may want to create new connections to find a job and ease the transition into the next stage of life.
The Payoff for Preparedness
The sooner you start getting ready for working in retirement, the better.
Ralph Warner, the author of Get a Life: You Don’t Need a Million to Retire Well, gives this example: Let’s say you've always dreamed of working on environmental causes in retirement, but you’ve never done anything like that. Now you’re 65 or 70 and head toward an environmental organization you admire saying: “Here I am. How can I help you?” You might be told you could help out by doing some low-level volunteering, like answering the phones or getting the mailings out.
“Now, take that same person who gets involved with several local environmental groups in his 40s or 50s,” Warner says. “At age 70, he’s a respected senior person there, valued and needed because he earned it.” And he could start pulling down a part-time paycheck.
At retirement, he’s just won the trifecta: An income, a community and a mission.
Put Retirement Savings on Autopilot
Don’t get me wrong: Saving is important. Max out your 401(k) and IRA. Create a well-diversified, low-fee retirement savings portfolio.
But when it comes to retirement planning, I’d suggest putting your savings on autopilot as long as possible. Instead, spend your time investigating opportunities for an income and meaning later in life. The return on investment will beat anything you’ll get from picking a good mutual fund.
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