Money & Policy

Why Your Prospects for a Comfortable Retirement Are Better Than You Think

There's one important factor those retirement calculators often leave out

Odds are, if you’re in your 50s or early 60s, you’ve put your savings numbers into a retirement planning calculator to assess your prospects of a comfortable retirement. It’s safe to guess, the answer about your future retirement income is somewhere between dismaying and worrying. But it may also be misleading.

You may be forgetting to include potential part-time employment income. And that money could make you want to rethink how much of your savings to withdraw each year in retirement.

The Many Financial Benefits of Part-Time Work in Retirement

The typical value of 401(k) and IRA money for workers nearing retirement is about $120,000, according to the Federal Reserve. That translates to withdrawing about $4,800 a year ($400 a month) when you stop working, using the 4 percent rule-of-thumb withdrawal rate. But if you unretire and earn money working part-time — maybe a flexible job or a phased retirement or self-employment — this opens up multiple opportunities to boost household finances.

Staying employed part-time could let you hold off filing for Social Security. Your checks could be 75 percent larger if you wait to age 70 than starting at 62.

For one thing, employment income can affect how you structure your investment portfolio. You might be more comfortable staying longer with a larger asset allocation in riskier assets like stocks, rather than embracing the heavy-on-fixed-income investment recommendations of traditional lifecycle models.

“Most economists argue that the ability to retire when you want, rather than at a particular age, gives you a valuable option,” says Moshe Milevsky, finance professor at the Schulich School of Business at York University in Toronto. “You can take more risk with your portfolio.”

What the Retirement Calculators Overlook

And earning an income means you’ll be better off than many retirement savings calculators suggest. Here’s what I mean: Say you have that $120,000 in your 401(k) I mentioned earlier. But instead of retiring full-stop, you shift to part-time work in retirement, making $20,000 to $30,000 a year. That’s the equivalent of a 4 percent withdrawal on a $500,000 to $750,000 portfolio.

You can take some of that earned income and park it in savings — or at least not withdraw from savings for now. Perhaps this money can go toward paying off the mortgage and other debts.

“Earnings really do make a difference at any level,” says Ross Levin, founding principal and president of Accredited Investors in Edina, Minn.

Why Part-Time Work Can Mean a More Comfortable Retirement

But the really big financial impact from staying employed part-time comes from holding off filing for Social Security benefits, if you can. Your Social Security checks could be more than 75 percent larger if you wait to start filing at age 70 rather than at the earliest age, 62.

Delaying filing for Social Security offers even greater returns, often underappreciated. It puts less pressure on household savings, for instance.

Here’s an example: A two-income household earning $100,000 might need a portfolio of nearly $900,000 if they retire and file for Social Security at 62. (This calculation assumes they’ll need 80 percent of their pre-retirement income to maintain their standard of living in retirement.) If they hold off until 70 to file, though, they’ll only need a portfolio of $260,000 to maintain their lifestyle.

The decision to delay filing for Social Security is a terrific investment for those lucky enough to end up living long. It produces inflation-adjusted returns of 4, 5 and even 6 percent for those who live to their 90s and beyond, notes Michael Kitces, a certified financial planner and director of research at the Pinnacle Advisory Group.

Imagine — these are predictable returns without market risk.

Best Hedge Against Volatility

Better yet, filing for Social Security at 70 is the best hedge against economic and market volatility.

“The decision to delay Social Security delivers the best results when there is either unexpected inflation, unusually long longevity or especially bad market returns, which are the exact three scenarios that traditional portfolios are the least effective in managing, making the decision to delay Social Security the ultimate form of ‘anti-fragile’ triple hedge,” writes Kitces.

For too long, the discussion about finances and retirement has been too narrowly focused on retirement savings and a calendar date for withdrawing from the workforce. Bringing a job into the equation should be a critical part of the retirement equation.

The right metaphor for retirement planning is to “think of a centipede” and its many legs, including part-time work, says Meir Statman, finance professor at Santa Clara University and author of the forthcoming Finance for Normal People. Adds Joel Larsen, principal and certified financial planner at Navion Financial Advisors in David, Calif.: “We have multiple balance sheets.”

The unretirement mantra of “purpose and a paycheck” in the second half of life is a major reason why the retirement years should turn out better for most people than a quick glance at retirement savings would suggest.

Chris Farrell
By Chris Farrell
Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author
 of the books Purpose and a Paycheck:  Finding Meaning, Money and Happiness in the Second Half of Life and Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life.@cfarrellecon

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