Is Working Past Age 65 a Realistic Option?

Note: This article originally posted on July 31, 2012, but we are re-featuring it as part of Morningstar.com's Retirement Readiness Week.

Question: My retirement portfolio has underperformed during the past several years, and it looks like I'll have to keep working longer than I had anticipated. Are there any potential pitfalls of which I should be aware? 

Answer: Working into your late 60s and 70s, once seen as unusual, is indeed becoming more common. In fact, the number of U.S. workers age 65 and older doubled from 1977 to 2007, according to the U.S. Bureau of Labor Statistics, while the number of workers age 16 and older increased by about 60%. Those figures do not yet reflect the coming golden years of the baby boom generation (those born between 1946 and 1964), the first of whom reached 65 last year. Currently about one out of six seniors works or is looking for work, a rate that has been increasing since the late 1990s. According to data compiled by the Social Security Administration, wage income is the second most important source of income for people age 65 and older, trailing only Social Security.

Low Savings Rate Points Many Toward a Working Retirement
It's no surprise to hear many people talk about working beyond age 65. The stock market's mediocre performance during the past decade, as well as the housing bust, has left many with fewer assets than they'd anticipated at this point in their careers. The average 401(k) balance is about $74,600, according to Fidelity Investments, and about 60% of U.S. workers say they have less than $25,000 in savings and investments (excluding the value of their homes and any defined benefit plan), according to the Employee Benefit Research Institute. That means that many aspiring retirees might have no choice but to keep working if they hope to maintain anything resembling their current lifestyles in retirement.

Others plan to keep working because they enjoy it, and working longer helps them put off having to tap into retirement savings, improving the odds against them outliving their money. Working longer also might allow them to delay taking Social Security, boosting annual payouts. The increasing number of seniors staying in the workforce is partly a byproduct of people living longer. In 1970, the average American age 65 could expect to live another 15.2 years. By 2009 that figure had climbed to 19.2 years.

The percentage of older workers is expected to continue rising in the upcoming years. A 2008 BLS report estimated that workers age 65 and above will account for 6.1% of the total workforce by 2016, up from 3.6% a decade earlier.

Health, Job Market Among Factors to Consider
However, even though the U.S. workforce is undoubtedly getting grayer, assuming you will be able to work in retirement, and therefore don't need to save much, could turn out to be a costly mistake. A recent EBRI Retirement Confidence Survey found that 70% of current workers plan to work for pay in retirement, but only 27% of current retirees said they'd actually done so. Moreover, 72% of current workers said they were very or somewhat confident they'd be able to work as long as they need to, whereas 54% of retirees said they were not confident they could find work if necessary.

There are a number of reasons workers' plans to stay on the job well into their senior years can become derailed. Below are a few of the most common.

Health
Many seniors encounter health problems that cause them to drop out of the workforce. And even those who remain in good health might find that they need to stop working in order to care for a spouse or another loved one. In a 2011 EBRI survey, nearly two thirds of those who retired earlier than planned said health problems or disability played a role in their decision to stop working.

Physical Demands
Some occupations can be hard on an aging body. Jobs that require physical stamina, such as construction, or long periods of standing, such as nursing or retail sales, might prove too taxing for some older workers.

Skill Requirements
Although plenty of today's seniors are extremely tech-savvy, staying current on the latest software or technical skills can be a challenge for some older workers. They also might have to compete for work with younger, less expensive job-seekers whose skills are more up-to-date.

Unemployment: Many older workers find that once a job is lost, it's very hard to find another. In fact, the estimated percentage of unemployed workers age 55 and older who were out of work for at least a year has increased dramatically in recent years, from 11% in 2008 to 36% in 2011. Companies might be reluctant to hire them at higher salaries when lower-cost, younger workers are available. Many older workers find they have no choice but to take a lower-paying job or drop out of the workforce altogether.

Economic Factors
In addition to the variables already mentioned, consider larger issues that can affect all workers. What if the economy goes into the dumps and unemployment spikes around the time you reach retirement age? What if the company you work for hits hard times and has to let people go? Also bear in mind that competition among people with your profile--older workers with lots of experience but higher salary requirements--is likely to increase as more remain in the workforce in the coming years.

The Importance of Your Own Personal Safety Net
Working in retirement can be a great idea, as more and more seniors are discovering, but assuming it will be an option for you is a risky proposition. So much can go wrong, and if it does and you haven't saved enough, you might find yourself facing a very unhappy, nonworking retirement. A far better strategy is to put away as much as possible and at as early an age as possible to allow your retirement savings time to grow. That way a working retirement can be a choice rather than a necessity. And if work turns out not to be an option, you'll still have a good-sized nest egg to fall back on rather than a pile of regrets.

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