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By Jason Stipp and Christine Benz | 09-10-2012 04:00 PM

Pros and Cons of Retirement Catch-up Strategies

Morningstar's Christine Benz outlines the advantages and drawbacks of working longer, tapping Social Security early, upping your savings rate, and tilting toward riskier assets to offset retirement-saving shortfalls.

Jason Stipp: I'm Jason Stipp for Morningstar.

It's Retirement Readiness Week on, and today we're helping pre-retirees play catch-up if they're worried they haven't saved enough for retirement.

Here to talk about some of the pros and cons on the levers that pre-retirees can pull to play catch-up is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: Christine, one of the first things that folks who are concerned they haven't saved enough perhaps will resort to is the idea that, maybe I don't want to, but I'm just going to work longer into retirement, work past that regular retirement age. What are some of the pros and cons on working longer?

Benz: Well, there are really a lot of benefits to this strategy, so you can see why people have gravitated toward it. One is pretty obvious that, if you continue to work, you'll probably be able to continue to save, so that's an advantage.

Another one is that you will reduce the number of years during which you'll be drawing upon your portfolio, so you'll reduce the stresses that you'll put on your portfolio when you actually do retire. So, your portfolio won't necessarily need to be as large as it would for someone who retired younger.

Finally, you'll probably be able to defer Social Security for the number of years that you continue working. People who defer Social Security really do see a powerful compounding benefit; they get roughly a 7% to 8% increase in benefit for every year they wait past 62 until age 70, along with an inflation adjustment. So, that's a guaranteed benefit; it's very, very valuable.

So, those are three things that line up in favor of working longer.

The key disadvantage is that it's difficult to know for sure that you'll be able to continue to do so. So, while working longer is the backup plan for a lot of pre-retirees these days, they may have health issues or spouses' health issues that interfere with their ability to continue work. They may not be able to continue work. They may lose a job and not be able to replace it.

So, it's not necessarily a backup plan. In fact, our colleague Adam Zoll, wrote an article where he examined people's ability to work past age 65, and what he found was that, 70% of people who are not yet retired say that they plan to work past 65, but only 27% of people who are currently retired said they actually did work past 65. So, there is a little bit of a disconnect there, perhaps some people are being unrealistic about their ability to continue to work even though they have every intention of doing so.

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