"Save, save and save some more" is one of the mantras of retirement preparation. These days, it's joined by "work, work and work some more." Continuing to work past the age of 65 would be a huge financial and lifestyle change for older Americans. If it happens.
For years, retirement surveys have found a large gap between when people say they plan to retire and when they actually mothball their office and factory wardrobes. Consistently, actual retirements have occurred closer to age 62, the earliest age which people can elect to begin receiving Social Security benefits. This has been several years earlier, on average, than the dates preretirees say they plan to stop working.
The gap persists, but it's getting smaller. Enough people have deferred retirement to move the needle. More and more, retirement is becoming a phased process and not a single event in time. As you consider your own retirement prospects, here's a checklist of investment and income issues you should review:
1. Work-retirement tradeoff. For each additional year you work, you should be able to generate an additional two to three years of retirement coverage. There is, of course, the extra year of work itself. Presumably, you will spend none of your retirement nest egg during that year and hopefully will add to your savings. Let's say this adds 6 percent to your nest egg (the 4 percent you didn't spend and 2 percent in new savings). You'll also get an extra year of earnings on your retirement funds. That should be worth another 6 percent. Lastly, you can extend the age at which you begin collecting Social Security. Social Security benefits rise by roughly 8 percent a year for each year you delay taking benefits between ages 62 and 70. That's 12 percent more in your nest egg and 8 percent tacked onto your Social Security income for each year you continue working. The added income may even raise your Social Security benefit if you earn enough to raise your lifetime wage base.
2. Longevity and retirement. Once you turn 65, current longevity statistics say you'll live, on average, another 18 years (for men) to 20 years (for women). Your retirement savings will need to stretch over a shorter period should you keep working until age 70.
3. International investments. Traditionally, diversification of retirement investment portfolios has been about asset classes – making sure there was an appropriate balance between stocks and bonds, and paying attention to the risk and return characteristics within each type of asset. Increasingly, your investment mix needs to become focused on foreign holdings. That's where the world's economic growth will be found, and it's where a good percentage of your retirement funds should be invested as well.
4. Interest rates. Waiting for Godot seems to pass in an instant compared with the interminable wait for interest rates to rise. Only the House of Representatives' votes to repeal the Affordable Care Act have occurred with more regularity than forecasts for higher interest rates. And there has been a nudge in that direction, but only a nudge. If your retirement investment strategy is tied to the inevitability of higher interest rates, you might just want to get a season pass to that Samuel Beckett play.
5. Volatility. Expect a lot of volatility in the performance of your investments. This argues for setting aside more reserve funds, so you aren't forced to sell investments at a bad time. Flexibility is essential here, so don't lock too much of your funds in holdings that cannot be quickly changed.
6. Glide path. As we age, our investment holdings should gradually become less risky and provide better protection against market declines. The changing mix of stocks and bonds is known as a glide path. Make sure you know what the glide path is for your holdings, and do the homework needed to make sure it's an appropriate path for you. Lots of people don't have a financial adviser and may not be comfortable actively managing their investments. If this describes you, consider investing in target-date mutual funds. They are geared to people of different ages and automatically shift investment holdings to achieve specific glide paths explained in the funds' prospectuses.
7. Higher medical expenses. The biggest failure of most retirement investment plans is underestimating out-of-pocket medical expenses. The rate of medical inflation has decreased, but not by enough to make a meaningful dent in lifetime costs. When you calculate how much you will spend in retirement, and thus how much money your retirement savings will have to provide you each year, don't ignore medical expenses.
8. Income spigots. Investment assets don't pay the bills. You will need to convert those assets into regular monthly income. Individual retirement accounts and 401(k)s require minimum distributions once you turn 70½. There are tax considerations that can govern which investments you sell and when. Your nest egg conversion, in short, will require a lot of planning. It's best to build your plan several years before you actually retire.