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Working Longer Can Be a Win-Win for Investors

RETIREMENT PLANNING: Putting off dipping into savings and deferring your State Pension can substantially improve your financial position once you do stop working

Adam Zoll 24 January, 2013 | 6:46PM

Historically a senior citizen's work status has fallen into one of two categories: working or retired. But as the baby boom generation enters its so-called golden years, and as more seniors find their productivity fuel tanks have yet to hit "Empty," a sort of hybrid retirement scenario is becoming more in vogue. Call it a working retirement, a practice retirement, or what have you, the basic idea is the same: Rather than make a sharp break from a working life to a life of leisure, many seniors are opting for a lifestyle that blurs these distinctions.

Of course, many seniors continue to work well into their 60s and beyond not by choice but by necessity. Insufficient savings, painful stock market losses locked in during the financial crisis, and personal circumstances such as an illness in the family have many seniors wondering if they'll ever be able to retire. A poll conducted in the US last July of non-retired voters aged 50-64 found that 72% believe they will have to delay retirement and half don't think they'll ever be able to retire. 

Saving Longer to Cover a Shorter Period of Time

Whether doing so by choice or not, working longer invariably has a positive effect on an individual's retirement planning due to three primary financial benefits.

  • Money saved for retirement has more time to grow. For every extra year worked, funds invested in a tax-deferred retirement account such as an ISA or SIPP enjoy another year of appreciation and compounding. Plus you can continue contributing to your retirement savings.
  • The number of years to be covered by retirement savings is decreased. By shortening the length of time your nest egg must last, you increase your odds of achieving your retirement lifestyle goals.
  • By continuing to work seniors can wait longer to take their State Pension, thus increasing the annual amount they receive once they do start taking benefits. Seniors can begin taking their State Pension within 4 months of State Pension age, but each year they defer can add about 10% to the total amount they receive. That's a tremendous rate of return on what is essentially a government-backed, inflation-adjusted annuity.

Delaying claiming your State Pension might not make sense in all cases, however. Workers with serious illnesses or whose family histories suggest a lack of longevity might decide claiming earlier works better for them.

Working Longer, Spending Less

Steven Sass, associate director of the Center for Retirement Research at Boston College, says many older workers who haven't saved enough or have seen their nest egg damaged by the recession feel helpless to improve their retirement outlook, but that's not the case. "The fact that they can dramatically improve their retirement income by delaying retirement is something they don't know," he says. 

Sass notes that too much emphasis is placed on near-retirees' investments and not enough on other factors. "The whole focus on save and invest is for most people misdirected," he says. "It's certainly right for young people, but as you approach retirement you've sort of got what you've got. There's not a whole lot more you can do. And how long you work, how much you spend, and what you do with your lifestyle are the levers [one can still control]." 

Sass mentions downsizing one's home as an important option for retirees looking for ways to reduce spending. He also says our ideas about retirement are built around an antiquated notion that people should stop working in their mid-60s. "Work today is a lot less physically demanding than it used to be," he says. "Older workers are much healthier." He adds that the average retirement age for men in the US today is about 64 "and that's young. If you can afford to retire, then go ahead and retire. Otherwise go back to work. You're not old."

Of course, working beyond the traditional retirement age is not an option for some seniors. An illness in the family, difficulty finding a new job following a layoff, or lack of interest in continuing to work lead some seniors out of the workforce. And those who delay retirement are more likely to be better off financially in the first place. "We do know that the people who tend to work longer tend to be higher-income people with nicer jobs," Sass says. Meanwhile, workers with lower-wage, less-attractive jobs are more likely to retire early, he says.

Easing Into Retirement

Given the clear advantages of adding a few more working years to the tail-end of one's career, some financial planners have come up with innovative ideas to encourage clients to do so. Christine Fahlund, a senior financial planner at T. Rowe Price Group, helped her firm devise a "practice retirement" concept which recommends that while seniors are still working, they can reward themselves for planning on working longer by spending more on travel and other familiar trappings of the retirement lifestyle they've agreed to postpone. Working longer might also provide an opportunity to meet other financial goals, such as paying off a mortgage, remodelling a kitchen, or helping children or grandchildren with university costs.

To offset any increased expenses related to the practice retirement lifestyle, Fahlund says older workers may wish to stop contributing to retirement plans since any amount added will have little time to grow anyway. "Your contributions this late in the game really don't have time to compound, so therefore the impact they had when you were younger no longer applies," she says. But contributing just enough to qualify for any company match is still a good idea, she adds, as that represents an immediate return on your investment.

The practice retirement concept also may appeal to investors who are in good financial shape but who may not have thought through what it means to leave the working world, Fahlund says. "A lot of them are prepared financially, but they haven't spent two seconds thinking about what it's going to be like once they retire," she says. Stopping work can mean an immediate loss of routine, status and identity, not to mention salary. 

To help workers get a clearer picture of what a practice retirement might look like, T. Rowe Price offers a worksheet that asks self-directed questions such as "What is my ideal work situation?" and "What new things do I want to do [in retirement]?"

For those nearing retirement age but unsure whether the lifestyle is right for them—at least for now—Fahlund has one piece of advice. "If you're on the fence about whether to continue working or not, stay with it," she says. "You can have your cake and eat it, too."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.