Older workers face a series of critical decisions as they transition from the workforce into retirement. Financial advisers are ideally positioned to help their clients navigate these decisions, including when to retire, whether to work part-time, when to claim Social Security and how to draw down their retirement savings.
Steve Vernon, a research scholar at the Stanford Center on Longevity and president of Rest-of-Life Communications, calls the age from 62 to 70 the “retirement opportunity zone,” when retirees and their financial advisers can create a game plan for a 21st century retirement that is likely to last longer than those of previous generations.
For many retirees, their new job in retirement is to tackle this big planning challenge, which includes important decisions about medical insurance to augment Medicare, protecting against long-term care risk, enhancing health and longevity, and nurturing a social portfolio that can be critical to well-being.
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In addition, some retirees may want to consider how to deploy their home equity, whether that’s by downsizing to a smaller, less expensive home or taking out a reverse mortgage, Mr. Vernon said during a recent webinar.
Mr. Vernon, who has written five books on retirement planning, including his latest, “Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life,” says retirees should build a retirement income portfolio that’s reminiscent of their income during their working days, divided into paychecks and bonuses.
In retirement, the paychecks that provide guaranteed income might consist of Social Security benefits, pensions, annuities and tax-free payments from a reverse mortgage to cover fixed costs in retirement. The bonuses — funded by withdrawals from invested assets, wages and other sources, such as rental income — can pay for discretionary spending, such as travel.
Using the example of a married couple, both age 60, Mr. Vernon demonstrated how using a variety of levers, such as working longer, delaying their Social Security benefits and making smart financial decisions, could nearly double their retirement income, from about $62,000 if they retire at age 62 to nearly $120,000 per year by postponing retirement until 70.
Separately, a new report from the Center for Retirement Research at Boston College dubs Social Security “a great equalizer” of retirement wealth across various racial and ethnic groups.
“The non-Social Security retirement wealth held by white households averages about seven times that of blacks and about five times that of Hispanics,” according to the recent issue brief authored by Wenliang Hou and Geoffrey Sazenbacher. “Adding in Social Security wealth changes the picture dramatically.”
The researchers noted that when Social Security benefits are added to the more traditional wealth measurements of pensions, defined-contribution plans, other investible assets and home equity, “retirement wealth for white households drops to about 2.5 times that of minority households.” They noted that “Social Security has such a powerful effect because the program is nearly universal and its benefit formula is progressive,” meaning the benefit formula provides much higher benefits relative to earnings for lower-wage workers than for their high-wage counterparts.
Two other recent pieces of research highlighted the availability of additional sources of income for retirees: home equity and employment.
A newly released working paper from CRR posed the question: Are homeownership patterns stable enough to tap home equity? The answer was a resounding “yes.” Most homeowners age 50 and older stay in their homes for decades and are well-suited to tapping some of their home equity through a reverse mortgage or property tax deferrals. However, few households choose either option.
“A potential reason that homeowners are reluctant to borrow against their house is that, if they do decide to move, they have to pay back the loan with interest, which could leave them with inadequate resources at a vulnerable time in life,” the report said.
“Retirees might be more likely to tap their home equity if they felt that they had adequate public or private insurance protection again the risk of needing long-term services and support,” the paper concluded.
Finally, a new analysis of Bureau of Labor Statistics data by SimplyWise.com, a website focused on Social Security benefits and other retirement income topics, found that the portion of seniors entering or remaining in the job market has reached near-record levels.
The labor participation rate among workers age 65 and older hit 20.6% in December 2019, the highest level in nearly 60 years, and the BLS expects that rate to keep growing, to an estimated 23.3% by 2028. In addition, the 2.6% unemployment rate for seniors in December 2019 remains below the 3.5% national unemployment rate. Sixty-two percent of employed seniors are working full-time.
Bottom line: The world of retirement is changing, and a 21st century retirement requires a game plan that embraces multiple strategies to create income, protect health and maintain critical social connections.
