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Working Longer Can Be a Win-Win for Investors

Putting off dipping into savings and delaying Social Security can substantially improve your financial position once you do stop working.

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Historically a senior citizen's work status has fallen into one of two categories: working or retired. But as the baby boom generation enters its so-called golden years, and as more seniors find their productivity gas tanks have yet to hit "E," a sort of hybrid retirement scenario is becoming more in vogue. Call it a working retirement, a practice retirement, or what have you, the basic idea is the same: Rather than make a sharp break from a working life to a life of leisure, many seniors are opting for a lifestyle that blurs these distinctions.

Of course, many seniors continue to work well into their 60s and beyond not by choice but by necessity. Insufficient savings, painful stock market losses locked in during the financial crisis, and personal circumstances such as an illness in the family have many seniors wondering if they'll ever be able to retire. An AARP poll of nonretired voters ages 50-64 taken last July found that 72% believe they will have to delay retirement, and half don't think they'll ever be able to retire. 

Saving Longer to Cover a Shorter Period of Time
Whether doing so by choice or not, working longer invariably has a positive effect on an individual's retirement planning due to three primary financial benefits.

Christine Fahlund, a senior financial planner at  T. Rowe Price Group (TROW), says that delaying Social Security plays a key role in this strategy. "It's longevity protection. It's inflation protection. It's a check in the mail every month," she says. By waiting to take Social Security until age 70 rather than taking it when first eligible at age 62, seniors can nearly double the purchasing power of their benefit checks, Fahlund says, "and that's for the rest of your life."

Delaying Social Security might not make sense in all cases, however. Workers with serious illnesses or whose family histories suggest a lack of longevity might decide taking Social Security earlier works better for them.

To illustrate the benefits of delaying retirement, T. Rowe Price ran a simulation involving a fictional 60-year-old couple making $100,000 per year, with $500,000 in retirement savings and hoping to retire in two years. Based on assumptions about the rate of inflation and investment returns, the simulation found that if both spouses retire and take Social Security at age 62 they will have a total of $51,583 in income the first year and have $516,270 saved for retirement at age 70 (scenarios assume the couple maintain a 10% annual contribution to their retirement plans while working). However, by delaying retirement until age 66, the couple's income during their first year of retirement jumps to $69,545, with a projected savings balance of $659,060 when they reach age 70. Waiting until they are both 70 raises the annual income for the first year of retirement to $93,449 and the size of the nest egg to $855,925, or about two thirds more than they would have at that point if they retire at 62. The simulation assumes the couple continue to work full time, but even working part time can be beneficial if it helps delay dipping into retirement savings and Social Security.

To run your own scenarios on the benefits of working longer, try an online retirement income calculator such as those offered by T. Rowe Price and the Financial Security Initiative at Boston College.  

Working Longer, Spending Less
Steven Sass, associate director of the Center for Retirement Research at Boston College, says many older workers who haven't saved enough or have seen their nest egg damaged by the recession feel helpless to improve their retirement outlook, but that's not the case. "The fact that they can dramatically improve their retirement income by delaying retirement is something they don't know," he says. 

Sass notes that too much emphasis is placed on near-retirees' investments and not enough on other factors. "The whole focus on save and invest is for most people misdirected," he says. "It's certainly right for young people, but as you approach retirement you've sort of got what you've got. There's not a whole lot more you can do. And how long you work, how much you spend, and what you do with your lifestyle are the levers [one can still control]." 

Sass mentions downsizing one's home as an important option for retirees looking for ways to reduce spending. He also says our ideas about retirement are built around an antiquated notion that people should stop working in their mid-60s. "Work today is a lot less physically demanding than it used to be," he says. "Older workers are much healthier." He adds that the average retirement age for men today is about 64 "and that's young. If you can afford to retire, then go ahead and retire. Otherwise go back to work. You're not old."

Of course, working beyond the traditional retirement age is not an option for some seniors. An illness in the family, difficulty finding a new job following a layoff, or a lack of interest in continuing to work lead some seniors out of the workforce. And those who delay retirement are more likely to be better off financially in the first place. "We do know that the people who tend to work longer tend to be higher-income people with nicer jobs," Sass says. Meanwhile, workers with lower-wage, less-attractive jobs are more likely to retire early, he says.

Easing Into Retirement
Given the clear advantages of adding a few more working years to the tail-end of one's career, some financial planners have come up with innovative ideas to encourage clients to do so. Fahlund helped her firm devise a "practice retirement" concept which recommends that while seniors are still working, they can reward themselves for planning on working longer by spending more on travel and other familiar trappings of the retirement lifestyle they've agreed to postpone. Working longer might also provide an opportunity to meet other financial goals, such as paying off a mortgage, remodeling a kitchen, or helping children or grandchildren with college costs.

To offset any increased expenses related to the practice retirement lifestyle, Fahlund says older workers may wish to stop contributing to retirement plans since any amount added will have little time to grow anyway. "Your contributions this late in the game really don't have time to compound, so therefore the impact they had when you were younger no longer applies," she says. But contributing just enough to qualify for any company match is still a good idea, she adds, as that represents an immediate return on your investment.

The practice retirement concept also may appeal to investors who are in good financial shape but who may not have thought through what it means to leave the working world, Fahlund says. "A lot of them are prepared financially, but they haven't spent two seconds thinking about what it's going to be like once they retire," she says. Stopping work can mean an immediate loss of routine, status, and identity, not to mention salary. 

To help workers get a clearer picture of what a practice retirement might look like, T. Rowe Price offers a worksheet that asks self-directed questions such as "What is my ideal work situation?" and "What new things do I want to do [in retirement]?"

For those nearing retirement age but unsure whether the lifestyle is right for them--at least for now--Fahlund has one piece of advice. "If you're on the fence about whether to continue working or not, stay with it," she says. "You can have your cake and eat it, too."

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.