Nearing retirement: the big question to ask

For many Americans nearing retirement, the question of whether or not to continue working is a big one—possibly the biggest. It’s a decision which not only impacts other retirement decisions, it can have a major effect on your finances, your lifestyle, and your legacy.

A recent 2021 survey found that 71% of respondents are planning to keep working into retirement, with 44% concerned that they may never be able to fully retire.^{Disclosure 1} Even those with substantial investment portfolios may need (or want) to work, at least for the first few years of retirement.

It's not necessarily a bad thing: continuing to work, even part-time or for just a few years, can have an incredibly positive impact on both your long-term and short-term financial wellness. It can even help maintain your physical health too.

Although it may seem counterintuitive—since retirement is defined as the end of work—considering the ‘will-I-work-in-retirement’ question is an important first step to crafting a realistic retirement plan. But the decision to work—especially how long and in what capacity—is a vital piece in your overall financial plan.

To work or not to work?

Retirement isn’t ‘one-size-fits-all.’ These days, fewer people work until age 65 and then just ride off into the sunset. You may work longer, change job functions, shift to part-time, or take on a consulting role. Consider some of the main ways work could impact your retirement plan:

• Social Security. One of the main reasons many people choose to continue working is the way Social Security benefits are structured. While you can start collecting benefits at early as age 62, the monthly amount you receive will increase each year you delay collecting your benefits (up to age 70).

“Here’s a little retirement income trivia for you,” offers Steven A. Sass, an economic researcher at Boston College’s Center for Retirement Research. “How much higher are your benefits if you delay taking them from 62 to 70, the earliest to the latest?”

“There’s a 62% increase,” Sass points out.^{Disclosure 2} “That’s jaw-dropping. A lot of people think there’s not a lot they can do to increase retirement income, but that’s a pretty impactful increase.”

While not everyone will see that exact increase, it’s indicative of the difference delaying retirement can have. It’s not just a few dollars—it can be hundreds of dollars each month. And while you don’t have to work in order to delay taking Social Security, many retirees will opt to make up that income somehow.

• Budgeting and expenses: Keeping a close eye on where your money is going is especially important when retirement is just a few years away. Tracking your expenses carefully will give you a more realistic understanding of what your budget will need to look like and therefore how much longer you may need to work—as well as what costs are associated with working.

More importantly, spending less and saving more has the dual benefit of adding more money into your retirement savings while moving to a more sustainable standard of living. The reduction in the amount you need to live on in the future will have the biggest effect—it will generally be much greater than the increased income from the additions you’re able to make to your saving, Sass cautions.

• Determining post-retirement income: The basic rule of thumb is that 70% to 80% of your pre-retirement income should be replaced by Social Security, pensions, annuities, investments, IRAs and other savings. Many retirees, however, are only prepared to replace less than 60% of their pre-retirement income. That leaves a gap where additional income would make a big difference.

• Pensions and related income: The income from continuing to work may allow you to delay drawing income from pensions and/or annuities. But couples must carefully address issues of survivorship, estate planning, taxes and investment returns when they plan to begin distribution of pensions and annuities. So this planning should be well underway if retirement is only five years away.

• Housing: “For most people, their home is both their biggest store of savings and biggest expense,” Sass notes. What you do with your home in retirement is also a major consideration that will be impacted by your decision to work. Many retirees consider downsizing—an excellent way to reduce expenses and increase available savings, Sass says. He recommends downsizing early, as it’s easier both socially and physically. Downsizing also helps you reap the benefits of savings over a longer period of time. If you’re still working, however, that may limit where and how you downsize.

• Risk tolerance: Your advisor is a critical resource to advise on asset allocation and financial preparation for retirement. Remember that as you leave the workforce or reduce your participation, your ability to tolerate financial setbacks diminishes. They can also help you figure out what savings you’ll need to comfortably survive certain life events, such as a major illness.

There are more than mere financial reasons to continue working in some capacity during retirement. “One of the things you have to consider is, what are you going to do to give yourself a sense of identity and a sense of purpose in retirement—volunteering, reading, learning things,” Sass councils. “It’s kind of hard to replace a lot of the personal activities and goals that everyone has when working.”

What kind of post-retirement work is right for you?

Just because you continue to work in retirement doesn’t mean you have to continue doing the same thing. Experts call this idea ‘bridge employment.’ It can be a part-time job, self-employment, or even working in a reduced capacity for your current employer. There’s a strong argument to be made that continuing to work (in some capacity) in retirement can help keep you socially active, engaged, and generally happier as opposed to stopping work altogether.

Healthcare and retirement

Retirees who continue to work in some capacity typically enjoy better health than those who choose not to work at all. A 2015 Harvard Medical School study found a compelling link between work and health: Those still working past age 65 were about three times more likely to report being in good health compared with those who had retired completely.^{Disclosure 3} Research also suggests that working even a year past 65 lowers the risk of death from all causes by nearly 11 percent.^{Disclosure 4}

Regardless, it’s important to consider how you’ll pay for your health needs during retirement. Whether you work or not, you’re eligible for Medicare starting at age 65. But it’s important to take a close look at what’s covered under Medicare, and whether you want supplemental coverage to meet your needs.

Keep in mind that you must sign up for Medicare Part B within seven months of turning age 65, or you may incur a late penalty. You can delay signing up if you’re still covered by health insurance provided by an employer and will instead be eligible for an eight-month special enrollment period when you’re no longer covered. Exceptions apply, however, so it’s important to closely review your enrollment rules with an advisor.

Beyond the basics of Medicare, you may also want to look into long-term care insurance to protect your savings from the high cost of long-term care that isn’t covered by Medicare or other private health insurance. If your health status may disqualify you from obtaining long-term care insurance, Sass recommends considering a deferred annuity that wouldn’t start generating income until your mid-80s, as a way to mitigate longevity risk and help pay for long-term care. A deferred annuity also makes the task of drawing an income out of a pile of savings much easier.

Changing portfolio needs

As your timeline toward retirement shrinks, your investment portfolio needs may change. The basic recommendation is to get more conservative with your investments as you near retirement, Sass says. The main reason: you can’t respond as well to risk if you don’t have sufficient time to recover from a fall in the market. However, to the extent that you can continue to work, should the market fall, you wouldn’t need to make as large a change to your investment strategy.

“A lot of people don’t mind working,” Sass notes. “You might get tired of this or that aspect, so you don’t have to keep your same job. But finding another way to earn an income while you let your retirement assets grow—which will increase your retirement income about 7 or 8 percent each year—can make a big difference.”