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Warning: Don’t Count on Retiring Late

If you’re planning to retire later in life, you’re not alone. An estimated 25% of Americans intend to keep working well into their 70s, and 70 itself is the second most popular target retirement age among working adults (65 being the most popular). 

Not only that, but there are more older members of the workforce today than ever before. As of May 2016, nearly 9 million Americans 65 and older were employed full- or part-time. Back in May 2000, that figure was just 4 million.

Image source: Getty Images.

Of course, there are many benefits of retiring late, from boosting your nest egg to growing your Social Security benefits. But while it’s not a bad idea to plan to retire later in life, whether or not that actually happens may be well outside your control.

The myth of late retirement

Countless adults assume that if they make the conscious decision to retire at 70 or beyond, they’ll have the option to do so. But workplace data tells us otherwise. A surprising 60% of U.S. workers end up being forced to retire earlier than planned, according to Voya Financial. For some, it’s a matter of getting laid off and struggling to find suitable work. For others, it’s a matter of failing health. And then there are those who wind up retiring earlier than anticipated because a loved one comes to need hands-on care.

Not only do 60% of adults tend to stop working earlier than anticipated, but for most, retirement catches them off-guard. Of those who left the workforce sooner than planned in the aforementioned study, 29% said the timing of their departure was somewhat expected, while 31% said it was very unexpected.

What all of this tells us is that retiring late may be something most folks can only hope to do, as opposed to count on doing. And if you’re one of them, it may be time to rethink your savings strategy.

You may not get that extra time

Those who enter their 60s without much in the way of savings have a viable option for catching up in theory: Rather than call it quits at 62, 65, or even 67, they can work a number of extra years, sock away money in their IRAs or 401(k)s, and stretch their limited nest eggs in the process. The problem, of course, is that not everyone gets the option to catch up on savings later in life. So if your plan is to neglect your nest egg in your 40s and 50s, and ramp up during your 60s, you should be aware that your strategy might fail.

Imagine, for instance, that your plan is to max out your 401(k) between the ages of 65 and 70 for a total contribution of $122,500. (Note that 401(k) limits are going up next year, and workers 50 and older will get the option to contribute up to $24,500. Assuming that limit stays the same over the next half-decade, maxing out would bring us to $122,500.) That’s clearly a lot of money, and a sum that could spell the difference between living comfortably in retirement and having to seriously cut corners.

Well, what happens if you get laid off at 65, or run into a health issue that renders you unable to work? Suddenly, your strategy goes to pieces, and you’re left with a $122,500 hole to fill. That’s why while it’s a fine idea to plan to retire later in life, you need to save aggressively when you’re younger and are less likely to lose your job due to one of the aforementioned factors.

Now one reason many people don’t save for retirement in their 40s or 50s is that those years are when expenses tend to peak (think mortgage payments, college tuition, and the like). But if you start saving early enough, you won’t need to fork over a huge chunk of your income to build a decent nest egg. Rather, you’ll get away with setting aside smaller amounts if your investment window spans several decades.

The following table shows how much you might accumulate by socking away a mere $300 over several different timeframes:

Savings Window

Ending Nest Egg Balance (Assumes $300 Monthly Contribution and Average Yearly 7% Return)

30 years

$340,000

25 years

$228,000

20 years

$147,000

15 years

$90,000

Table and calculations by author.

Note that the $340,000 above will come at an out-of-pocket cost of just $108,000 thanks to the power of compounding. On the other hand, if you give yourself less time to save for the future, you’ll limit the extent to which compounding gets to work its magic.

Whether you’re intending to retire at 70, 75, or beyond, don’t put off your savings efforts with the assumption that you’ll catch up later on. You may not end up getting that option, and if you don’t, your retirement is apt to suffer.

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