For a variety of reasons, a large percentage of Americans just aren’t very good at fully retiring.
Many retirees see part-time work as a good transition strategy with 57% of retirees wanting to continue working in some form while only 43% would consider stop working all at once.
This is according to a report entitled, “Unretiring”: Why Recent Retirees Want to Go Back to Work, released this week by Baltimore-based recordkeeper T. Rowe Price.
While the COVID-19 pandemic may have created an unusually large wave of retirees who have subsequently returned to the workforce, the study found the trend of returning to work in retirement is continuing to grow. Of those who consider themselves retired, the report shows that 20% work either part or full time, while another 7% of respondents reported looking for employment, post pandemic.
The report also noted many retirees return or continue to work due to their retirement lifestyle and for financial reasons. Roughly 48% of those working in retirement felt they needed to work for financial reasons and were mostly from the lower asset thresholds, which included a higher percentage of women and single retirees. The report also found 45%—and men in particular—chose to work for social and emotional benefits.
“Many retirees either choose to work or need work to be included in their retirement lifestyle,” says Judith Ward, CFP, a thought leadership director at T. Rowe Price. “The decision can have many powerful positive effects, not least of which is financial well-being.”
Some of the largest financial benefits of additional years of work are delaying retirement account withdrawals and delaying claiming Social Security benefits. At the same time, working in retirement could impact Social Security benefits prior to one’s full retirement age (FRA).
The power of delaying retirement
In the report, Ward considers the hypothetical example of a 62-year-old who earns $100,000 per year, has $900,000 set aside for retirement, and expects to spend about $63,000 per year in retirement. If she retires this year, there is a 68% chance that she will not outlive her funds in retirement, based on projections generated by the T. Rowe Price Retirement Income Calculator. The likelihood of not outliving one’s retirement funds is what the report refers to as the “probability of success.”
“The improvement in this hypothetical scenario illustrates how higher Social Security payments result in better portfolio sustainability over a retirement horizon that could last decades. Delaying retirement is that powerful.”
T. Rowe Price’s Judith Ward
If she delays retirement by just a few years (until age 65), however, her probability of success rises to 91%. Waiting until full retirement age (FRA) at age 67 increases that probability to 97%. Both of these delayed scenarios are well within T. Rowe Price’s target confidence zone of 80% or higher.
“The improvement in this hypothetical scenario illustrates how higher Social Security payments result in better portfolio sustainability over a retirement horizon that could last decades,” Ward said. “Delaying retirement is that powerful.”
The report also notes that working prior to achieving full retirement age while receiving Social Security benefits can reduce the size of benefits because of income limitations: If a worker exceeds the 2023 earned income limit of $19,560 per year, their benefits will be reduced by $1 for every $2 earned above the limit. (Benefits are recalculated once reaching FRA to give them credit for the months in which their benefit was reduced or withheld due to excess earnings.)
Once reaching FRA, working does not affect the amount of benefit a worker receives, with one exception: Additional years in which they earned a high income could potentially increase their benefit. With benefits based on best-paid years, it’s possible that a current wage could replace a lower or zero earning year for purposes of determining the person’s Social Security benefit. Ultimately, it may be better to delay claiming benefits until FRA or later while working.
SEE ALSO:
• Why Only 1 in 10 Americans Maximize Social Security Benefits
• Older Adults Greatly Underestimate Social Security Benefits: NBER Research
• Competing ‘Financial Vortex’ Challenges Retirement Savings