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Working Longer No Lock for Comfortable Retirement

In the past, most workers figured they'd be able to retire at the age of 65. But following 2008's financial crisis, the idea of working a few more years to recoup lost savings became commonplace.

August 30, 2012
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Workers who hoped they could solve their retirement savings problems by staying on the job until 70 could be wrong.

In the past, most workers figured they'd be able to retire at the age of 65. But following 2008's financial crisis, the idea of working a few more years to recoup lost savings became commonplace.

Data from the Employee Benefit Research Institute, however, shows that delaying retirement doesn't always help solve income shortfalls for those who are at risk.

Among those in the highest income quartile, 90 percent have only a 50 percent chance of having enough to retire by 70.

The numbers get more depressing as you move down the income ladder. Those in the second-highest quartile will need to hold off on retiring until 72 to have the same odds of having adequate income. Workers in the lowest pre-retirement income quartile will need to stay on the job until age 84 to make their nut.

EBRI's analysis of a sample of Americans age 50 to 59 in 2007 not only weighed auto-enrollment in 401(k) plans, auto-escalation features for contributions and the increased use of target date funds but also accounted for longevity risk, investment risk and the risk of major health care costs.

Longevity risk and health costs are the biggest factors hampering retirement readiness, according to EBRI. To determine the impact of long-term-care costs and longevity risk, researchers modified their results to ignore those factors. That allowed 73 percent of the subjects to be ready for retirement by 65, rising to 84 percent by age 70. When accounting for health expenses and longer lives, only about half of that age group was considered ready to retire at age 65.

EBRI's results did not jibe with a recent study by the Center for Retirement Research at Boston College. That report found that nearly half of Americans are prepared to retire at age 65, but 85 percent would be ready if they put in five more years at work.

"Different methodologies will produce different results, but both studies agree that working longer will help improve retirement security," said Andy Eschtruth, a spokesman for the Center for Retirement Research.

"I wouldn't want advisers to be in a situation where they come away with this rule of thumb that working to age 70 will cure everything," said EBRI research director Jack VanDerhei, author of the report. "If you're advising someone who's now in their 30s or 40s, and they can either contribute more today, or wait until 65 and work a few more years, that's risky."

In many cases, he noted, retirees have been forced to leave the workplace earlier than intended. "To wait until 65 is a risky proposition, and it's not good public policy to suggest that it's going to be OK," VanDerhei said.

Still, continuing to work had some positive effects. Employees who opted to stay in the workplace beyond 65 benefited from remaining in a company retirement plan, according to EBRI's analysis.

Among those in the 50-to-59 age bracket in 2007, 64 percent were ready for retirement at 65 if they were in a workplace defined-contribution plan. In contrast, those in the same age group who didn't participate in a 401(k) plan had a retirement readiness success rate of 44 percent.

Darla Mercado writes for InvestmentNews, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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