Posted on Wed, Oct. 08, 2008

Print E-Mail

Schnurman: A strategy for a collapsing stock market? Stay on the job longer

There’s no easy counterpunch for a bear market, especially when it’s mauling your retirement savings.

The experts are trotting out the usual advice, and it’s still true enough. Diversify investments, reallocate, think long-term, etc., etc.

But most people should ponder a more comprehensive solution: working longer.

That’s not more hours per week but more years per life. Do that, and the impact on retirement savings will dwarf anything you can get from shifting around investments, whether times are good or bad.

According to one study, the average person who works five extra years will have 56 percent more money to spend in retirement. And lower-income workers stand to gain the most from the decision.

"The choice of retirement age is the most important portfolio choice most workers will make," says a 2006 study by the Urban Institute, a Washington think tank.

It’s far more important than whether to invest your 401(k) in stocks or bonds, the study finds. Yet this strategy — to work longer by design — is not usually cited as an antidote to market turmoil or a way to enrich the golden years.

Too bad, because the benefits go beyond boosting your finances. Older workers tend to be more engaged, more healthy, more happy. They like a work routine, even if they’d prefer to put in fewer hours and have more time for vacation.

And Social Security, the retirement bedrock for most Americans, would be strengthened significantly if everybody worked five more years. That wouldn’t fix every problem in the system, but it would offset much of the shortfall for decades.

"Working longer increases your personal well-being and the government’s well-being," says Karen Smith, a retirement expert at the Urban Institute and co-author of several studies on the issue.

Delaying retirement lets you earn more and save more, and increase the monthly take from Social Security. It shortens the time you depend on savings alone, which provides more flexibility in making future withdrawals.

It also buys more time to absorb stock-market drops. That’s valuable today, given that the median retirement balance for older households dropped to $89,300 in September, a decline of $16,500 in the past year.

Working longer may sound like a jail sentence to some, especially those on the cusp of retirement. Plenty of other workers want to stick with their employers but don’t have the choice, because cost-cutting companies often whack senior employees.

A shift is under way nonetheless, and the Wall Street meltdown and housing slump will accelerate it. More men and women in their late 60s are working today, an increase of 10 percentage points in the past decade alone.

One in three older men and one in four older women are now employed, according to an Urban Institute report released this month. Even before the financial crisis hit, a quarter of retirees had returned to work.

The declining economy is having an effect on their plans, too. In an August survey by AARP Financial, 20 percent of respondents said they had pushed back their retirement date, and most said they didn’t expect to retire when they wanted to.

So more people will be working longer, like it or not. If they’d embrace the notion and government would offer the right kind of incentives, we’d all be better off — workers, employers and society.

Of course, some people can’t work longer, because of disability or illness. But many are willing and able, if it makes sense.

Except that some federal policies still encourage early retirement. Many rules were adopted in the 1960s and ’70s, when companies wanted to reduce pension liabilities and government wanted to make room for the baby-boom generation, then swelling the work force.

As a result, retirees can collect Social Security retirement benefits at age 62, and Medicare coverage kicks in at age 65, making that the "normal" retirement age. Social Security payments can be reduced by outside earnings, and some pension rules still push people toward the door.

"Older workers often have a choice — they can do extra work without getting extra income or they can retire and live on the same amount," Smith says. "It can be hard to convince people to keep working."

When Social Security benefits were first paid in 1940, the average worker retired at age 68, her study reports. In 2005, the average retirement age was 63, even though life expectancy — and the time spent in retirement — grew sharply.

If retirement benefits had stayed constant, the retirement age would have grown to 74 by 2005.

The nature of work has changed in the past six decades, with less emphasis on physically demanding jobs. And the health of older workers has improved significantly. Clearly, we can work longer — consider that John McCain is applying for one of the toughest jobs in the world at age 72.

Some thresholds for Social Security are being raised, with people born after 1960 having to wait until age 67 for normal retirement benefits. But neither government nor businesses are sending enough signals about working longer.

AARP Financial just put out a list of tips for a more secure retirement, and I can’t argue with the suggestions. It makes sense to maximize 401(k) contributions, make investing automatic and ask for help from a professional. But the advice doesn’t say anything about working longer.

"That usually comes up when they meet with an adviser and go over their retirement plan," says Richard "Mac" Hisey, president of the financial-products company.

Asked when they plan to retire, it often becomes clear they’ll have to work longer, he says.

But in that context, it sounds like a punishment. Better to think of it as a way of life.