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Investing Specialists

Laboring Longer: What You Need to Know

Working longer can deliver powerful financial benefits; the key is to be realistic about it.

Labor-force participation rates aren't expected to change a whole lot for most age groups in the years ahead; employment for the youngest segment, people ages 16 to 24, is even expected to decline a bit by the year 2024. Ditto for the age 45 to 54 band.

But the labor-participation rate for one age cohort is growing much faster than the others--people over age 65. The growth rate in employment for people between the ages of the ages of 65 and 74 is projected to be 4.5% between 2014 and 2024. And the 65-plus segment is growing even more rapidly; the growth rate in employment for that demographic is expected to soar 6.4% over that 10-year period.

There are many contributors to the trend. Full retirement ages for Social Security--the age at which one can retire and receive a full benefit from the program--have been increasing; full retirement age for people born in 1960 is age 67, for example. And notwithstanding a recent downtick, average life expectancies in the U.S. have been increasing over the past 100 years. Financial pressures are in the mix, of course: More and more people are coming into retirement without the benefit of a pension, and half of baby boomers have less than $100,000 in retirement savings.

In terms of shoring up retirement from a financial standpoint, working longer delivers multiple benefits. Being willing to work even a few years longer can help make up for a looming retirement shortfall much more reliably than tweaks at the investment-portfolio level can do.

Yet certain segments of the older adult population have a greater propensity to work past traditional retirement age; certain careers lend themselves better to working longer, too. And as Morningstar contributor Mark Miller put it, working longer is a worthwhile aspiration but not a backup plan. Health issues can limit an older adult's ability to continue working, as can a need to care for a spouse, parent, or other loved one. Age discrimination also remains an issue in the workplace

If you're mulling working longer as part of your retirement plan, here are some facts to help you ground your decision-making in reality.

Taking Stock of the Financial Benefits
Delaying retirement can be tough to swallow from a lifestyle perspective; most of us want to be able to pursue our passions later in life rather than having to report in for a job. But working longer delivers a four-fer from a financial standpoint, as follows.

Financial Benefit 1: Additional Contributions and Compounding
It's true that retirement-plan contributions made later in life have less of an opportunity to benefit from compounding than those made early in our working careers, but those later-in-life contributions can still make a big difference. Assuming a 65-year-old investor had the wherewithal to continue working and fully fund her 401(k), IRA, and HSA accounts in the ensuing five years (for a total contribution of $34,900 per year), and she earned a reasonable 4% return on her dough, she'd have about $189,000 in additional funds upon retirement at age 70. Of course, that's a heroic savings rate, but even if she could only save half as much, she'd still have close to $100,000 in additional funds available in retirement.

Financial Benefit 2: Delayed Portfolio Withdrawals
Another key financial benefit of working longer is the ability to postpone portfolio withdrawals; doing so allows for a higher safe withdrawal rate upon eventual retirement. The 4% guideline, for example, assumes a time horizon of 30 years, but a 70-year-old new retiree can reasonably employ a slightly higher withdrawal rate than that because his time horizon is shorter than the 65-year-old's. Moreover, that higher withdrawal rate for the late retiree would be on top of a higher starting balance, assuming the retiree had made additional contributions, outlined above, in the years leading up to retirement.

Financial Benefit 3: Additional Tax-Advantaged Compounding
Like investment appreciation, the benefits of tax-deferred compounding are the most impressive when stretched over a long time horizon. But extending a retirement time horizon by even a few more years allows a retiree's balance to benefit from additional tax deferral (or tax-free compounding, in the case of Roth assets). Retirees who are still making pretax/deductible contributions to their retirement accounts may also be able to reduce the taxes they owe in years they make those contributions. (They just need to mind the interaction between their paychecks and their receipt of other benefits, as discussed here.)

Financial Benefit 4: Enlarged Social Security Benefits
Delaying Social Security for even a few years, which working longer can enable a pre-retiree to do, can deliver one of the most powerful benefits of all. In 2017, for example, the maximum benefit for someone who begins collecting Social Security at age 66 is $2,687. Meanwhile, the maximum 2017 benefit for a 70-year-old is $3,538--more than $10,000 in additional funds annually. Even if a worker doesn't want to hold off on Social Security all the way to age 70, he can still pick up roughly 8% in additional benefits for each year Social Security benefits are delayed past full retirement age.

Nonfinancial Benefits of Working Longer
While the financial benefits of working longer are compelling, it's tough to find definitive data on the nonfinancial benefits of doing so--health, cognitive, psychological, and social benefits, for example. That's because there's a hopeless chicken-or-egg effect in play: Is the older worker healthier because of work, or are healthier people more like to work simply because they're able to? The same is true with linkages between working longer and staving off cognitive decline: Are working older adults more cognitively healthy because of the work, or does their high state of cognitive functioning make them more able to work? However, as discussed in this article, a large study of French workers found a connection between working longer and a lowered risk of Alzheimer's disease and other dementias. Moreover, people who continue to work past traditional retirement age have broader social networks than earlier retirees, who tended to see their social networks contract in the years following retirement.

Who's Working Longer?
In addition to taking stock of the potential benefits of working longer--as well as the trade-offs from a lifestyle standpoint--it's important to remember that certain subgroups of the population are more likely to continue to work longer than others.

They're More Likely to Be Men
Although men compose just 45% of the population who's older than age 65, they represent 55% of workers who are over age 65, according to a Pew Research study. One of the challenges for women working longer is that they're much more likely than their male counterparts to be caregivers--for their spouses or parents--as discussed here.

They Tend to Be Better Educated
The data also suggest that the post-age 65 working cohort is wealthier than people who don't work past age 65, likely because they occupy well-paid jobs that require more education. People with bachelor's degrees or higher are much more likely to work past age 65 than those without college or high school degrees. In a related vein, it's also worth noting that certain jobs lend themselves better to working longer than other positions, likely because the physical demands are less. The 65-plus cohort is well represented in jobs in management and sales, for example, but are much less prevalent in jobs in the construction/extraction industries, as well as in installation, maintenance, and repair jobs.

They're More Likely to Be Self-Employed and/or Part-Time
People who are working post age 65 are often seeking flexibility in their work/life balance, so it's probably not surprisingly that a meaningful percentage are self-employed. While just 6% of the age 35-44 cohort is self-employed, 16% of workers 65 and older are. Not surprisingly, older workers are also much more likely to work part time than younger workers are.

Impediments to Working Longer
Even as the percentage of the population working after age 65 has increased dramatically, it's worth noting that even people who intend to do so may not be able to. In a Transamerica study, fully 60% of older adults surveyed said they had retired sooner than they had planned. An older adult's own health issues--or those of a loved one--can force an early exit, and that trend can be exacerbated if the position is physically intensive. Of the Transamerica respondents who said they had retired earlier than they expected, job loss and/or corporate reorganizations were among the main culprits. Age discrimination is also a force to be reckoned with: 64% of respondents to an AARP survey said they have seen or experienced age discrimination in the workplace. The prominence of such external factors reinforce Mark Miller's assertion that a delayed retirement is a worthy aspiration but shouldn't be an older adult's sole backup plan.