The Financial Impact of Working Longer
The last thing any working professional wants to think about is working longer. However, working longer is an important lever (or option) to pull when it comes to your retirement lifestyle. It potentially allows a “richer” retirement and can give “more” to your lifestyle during your working years. In my experience of the 4 levers of financial planning, this is the one most are willing to do (and also the simplest).
It’s been said to maintain one’s lifestyle in retirement, you should be saving 20% of your take home pay. I am a big fan of saving; however, the reality is a dollar can only be sliced in so many ways. I’ll use my own life as an example. Besides the necessities (mortgage, food, etc.), I have my children’s swim, dance, gymnastic, art, and music lessons. Then there’s vacations and date night (which is very important, too). Also, there are other necessities my wife tells me about – like getting hair and nails done!
My point is, by the end of the month it can be a stretch for many of us to conjure up the required 20%. Now, I am not suggesting to skirt your responsibilities of saving, however, many of us choose to live in the now over planning for the future. I get it. My father died young and it made me understand the fragility of life. Many working professionals simply can’t afford to save more due to the demands of raising a family.
So, how can working longer help? It seems intuitive, but working longer provides that back end security. If we made a bad decision, got a late start, or just chose to live more for today, the reality is we can choose to work a few more years to make up for lost ground.
Let me be clear though — working longer shouldn’t be your only financial planning resource! Putting all your eggs in that basket can be scary and very risky. There are many things you can’t control. What if you or someone you love gets very sick? What if your kids need help? What if your employer no longer deems you relevant, hiring a newer and cheaper model?
So far, I’ve established what working longer can mean during your employment years. Let’s now dig a little further into the impact it could have on your retirement lifestyle. It’s important to note working longer than planned can take many different forms. For starters, many professionals decide to go part time or consult in retirement. I’ve found this can often be a great compromise to slowing down, without putting the car in park.
Others work harder the last few years. They see it as a pay day, or time to make up lost ground. During these years, generally you make the most money of your career. Also, you most likely have the least amount of expenses (often mortgages are paid off by now and/or your children are no longer a financial liability).
If you work into your mid to late 60s and cover your expenses, generally it’s a good idea to delay Social Security. Remember, Social Security not only has adverse tax implications if earning a high salary, but every year you wait (until age 70) translates into 8% higher monthly benefit. That can be a huge bump to your retirement viability, as it locks in a high fixed income in retirement. For many, it is the only consistent pay check received when work stops.
Although retirement investments are subject to market volatility, a well balanced portfolio statistically means your money will likely grow roughly 3 out of every 4 years. Therefore, if your retirement is delayed a few years, your money will likely benefit from the magic of compound interest (although there is no guarantee that past performance is indicative of future returns). A million dollar portfolio receiving 8% a year growth per year will grow to approximately $1,360,488, if you don’t touch it for 4 years.
Let’s stay on this train of thought. Not only do your dollars grow substantially on these back years, but it’s 4 less years of pulling these assets. Let’s say you need $80,000/yr to subsidize your living from your investment portfolio. By waiting these few years, you have just given yourself additional time and put less risk on the returns necessary to not outlast your funds.
I’ll assume, regardless of when you retire, you still pass away at the same age. Under this assumption, someone retiring at age seventy (vs. age sixty) has 10 less years to rely on their nest egg. This impact can be huge!
Finally, working those extra few years allows you to have one other key impact. It provides the ability to aggressively hoard money these last few years. If your mortgage is gone and children expenses are in the rearview mirror, all while earning at the highest levels of your life, you should be able to save substantially these final few years.
You can easily see the perks of working longer run deep. They afford you the ability to save more, which then can grow more. Your requirement on those savings will be less and higher fixed incomes de-risk your retirement. Not bad for a days (or a few extra years) work.
Working longer is my first of the four levers which can be pulled to help the viability of a financial plan. I think it best to use any of the levers I write about in conjunction with the others, to not put too much stress on any one strategy.
Hopefully, you’ve seen the reasons working longer can help. However, it shouldn’t be the foundation of a sound financial plan. Rather, use it as one tool which can afford you much flexibility when it comes to both pre- and post-retirement lifestyles.