Baby boomers and Gen Xers who opt to work beyond 65 may not have enough cash on hand to pay for basic expenses and uninsured health care costs when they do eventually retire, according to a research study released Tuesday.
Baby Boomers and Gen Xers can avoid such financial shortfalls after retirement if they sock money away in a defined-contribution plan, such as a 401(k) account, long before they reach age 65, says the Employee Benefit Research Institute, which used data derived from its retirement security projection model to come up with that conclusion.
EBRI executives say its retirement security projection model can now show whether deferring a worker's retirement past age 65 will help lessen any potential retirement income problems.
How a worker fares financially after retirement is directly tied to three factors: a worker's salary at retirement; how long a person works beyond age 65; and how much a worker pays into a defined-contribution retirement plan during their working lifetime, said Jack VanDerhei, EBRI's research director and author of the report.
"Our research finds that many people may have to delay retirement far beyond age 65 to increase the probability that they have enough money to cover their retirement expenses at a comfortable level," VanDerhei said. "What really makes a positive difference, we found, is if people who continue to work after 65 also continue to contribute to a defined contribution retirement plan."
VanDerhei says EBRI's research also indicated that the earlier workers begin to invest in a retirement fund, the lower their risk of falling into financial trouble after retirement.
"For Gen Xers, depending on whether or not you are in a retirement account for a long time, you could basically decrease your 'at risk' probability by a third," VanDerhei said. "It underlines the point to how important it is to have been in a 401(k) plan prior to age 65."
EBRI's research also indicates that the chances of having adequate financial resources on hand at retirement improve significantly as workers defer retirement longer and continue to work into their late 70s and early 80s.
"Certainly, first off the longer you defer retirement, the less years of retirement you are going to have," VanDerhei said. "The more you are going to have in Social Security, and the more savings you are going to have, as long as you are still participating in a 401(k) plan after age 65."
Since a worker's income prior to retirement is a key factor to determining whether he or she will be able to afford a comfortable retirement, EBRI's research examined how working past age 65 affects different pre-retirement income groups.
Lowest preretirement income quartile: For households in the lowest income group, only about 30 percent of the households will have sufficient resources to avoid running short of money in retirement roughly 50 percent of the time. That household count increases to 35 percent, however, if a worker's retirement is deferred until age 67, and 47 percent if retirement is deferred until age 69.
Second preretirement income quartile: For households in this group, less than a quarter (24 percent) of households would have a 70 percent probability of adequate income if they retired at age 65. This increases to 37 percent if they keep working to age 69.
Third preretirement income quartile: For households in the next-to-highest income group, almost half (49 percent) would have a 70 percent probability of adequate income if they retired at age 65. This increases to 61 percent if they keep working to age 69.
Highest preretirement income quartile: Over three-quarters (79 percent) of households in the highest preretirement income quartile are likely to have adequate income for retirement if they retired at age 65. It increases to 81 percent if the worker keeps working to age 69.