As an economist, it’s not in my DNA to draw blows. So I want to be honest: for most Americans, early retirement is not just a decision to take the longest vacation of their lives – it’s one of the biggest money mistakes they will regret.
The reason is simple: We as a group are miserable savers, which makes early retirement unaffordable. Financially, it is generally far safer and far smarter to retire later.
According to a report from the Boston College Center for Retirement Research, half of today’s working families risk a significant drop in living standards associated with retirement. The share would fall by about 50% if all workers were to retire two years later.
Of course, there are situations where early retirement is a good option. Some people have carefully planned and can afford to buy more free time. Many have no choice; they run out of physical or mental steam. Others find their jobs automated or outsourced.
Yet nearly two-thirds of people – between the ages of 57 and 66 – choose to retire early of their own free will, despite having spared almost nothing. And most of them are able to work without a disability, which would prevent them from staying on the job.
The baby boomer’s retirement debacle
Take the baby boomer generation, which is retiring. Almost half of them have little about any savings.
In fact, their median wealth is only $ 144,000 – less than three years of median household spending. If they had significant private, state or local pensions to rely on, things would look better. They do not.
Less than 1 in 3 have a pension other than social security. As for those retired, many had state and local public jobs that were not covered by social security.
What is worse, those who receive such pensions may lose most or all of the social security benefits earned from working part-time jobs in covered employment due to the social security provisions on equalization of unexpected and public pension equalizations.
Social security is not something to write home about
In fact, about 85% should wait until 70 to pick up. The 70-year pension is 76% higher, adjusted for inflation, than, for example, the 62-year benefit.
Furthermore, when Americans take out their Social Security pension far too soon, they are potentially sentencing their spouses or ex-spouses (whom they were married to for a decade or more) to far lower widow (s) and divorced widow (s).
You can not expect to die
Most people’s lack of savings reflects a lack of focus on life expectancy, which is routinely used to set one’s planning horizon. It will half of the 50-year-olds live after 80 years. A quarter will reach the age of 90.
To understand what adequate savings actually entail, take Jane, a single 40-year-old Louisian. Jane, who plans to retire and take social security as a 62-year-old, earns $ 75,000 a year and has $ 150,000 in her savings account – an inheritance from a rich uncle.
Jane could live to 100. Like the rest of us, Jane can not count on dying on time. She has to plan to live to her maximum age, because she can.
Jane has not saved anything. She counts on Social Security and her 401 (k), with its $ 150,000 balance, to which she and her employer contribute 3% annually to maintain her pension. Jane is miles from base. Her retirement may last longer than she works. If she turns 100, she will have to save 28% of her home pay each year through retirement!
What if Jane takes Social Security at 70? Good move! This increases her life expectancy by over 10% and lowers her required pre-retirement savings rate to 16%. And if she plays the odds of dying young and plans to lower her standard of living by 1.5% annually from 80? Now her required savings rate is 13%.
Unfortunately, Jane saves nothing. If she continues to do so, her standard of living after retirement will be half her standard of living before retirement!
Yet Jane is actually in better shape than many others. About a third of workers in the private sector have no pension scheme. And a quarter of those who do fail to attend, even to the point where they get their free employer match.
The answer is to postpone retirement
How to save non-saving Jane’s retirement? If Jane retires and takes social security as a 70-year-old, she does not have to save up herself. And her life expectancy will increase by a third!
Yes, it is a risky strategy. Jane can be disabled. Or she could be fired. But if she refuses to save a ton up and does not want to experience severe financial deprivation in retirement, her only answer is to keep working.
As for me, I have just turned 71. Fortunately, I have employment and can continue to research, write books and columns, and teach. My current plan is to die in the saddle. My work is just too rewarding – financially, intellectually and psychologically – to give it up.
Laurence J. Kotlikoff is a professor of economics and author of “Money Magic: An Economist’s Secrets to More Money, Less Risk and a Better Life.” He got his Ph.D. from Harvard University in 1977. His columns have appeared in The New York Times, WSJ, Bloomberg and The Financial Times. In 2014, The Economist named him one of the world’s 25 most influential economists. Follow Laurence on Twitter @Kotlikoff.
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