Part 4 of “Financial Follies: Common Retirement-Planning Mistakes and How to Avoid Them,” a recurring series about the best savings “levers” to pull depending on where you are in your career and your life. Read Part 1: The Cost of Waiting a Year, Part 2: Fees Can Eat Away at Your Retirement Savings, and Part 3: Trying to Time the Market is a Game You Can’t Win.
If everything always worked out as we planned, our lives would be pretty dull. In the previous three parts of this series on retirement savings, we gave guidance on the wisdom of starting to save early, of minimizing investment fees, and of staying invested. All of these assumed you were at an early point in your career and still had time to let your retirement savings grow.
But what if you are at the other end of the rainbow and haven’t made these great savings choices? What’s the best course of action if you’ve waited too long to get started, paid too much for management fees, or just made bad investment decisions along the way? With only a few years of work remaining before your planned retirement date, how can you catch up?
The good news is that there are still some good choices and steps you can make that can enhance your retirement. The most important thing that you can do is painfully obvious: keep working. That may not be what you wanted to hear, but it is the simple truth for workers who are nearing the end of their careers and haven’t planned well for their retirement.
Let’s look again at Brenda from Part 3 of this series. By trying to time the market, her retirement savings had fallen seriously behind. Suppose at age 55 she realizes her mistake and tries to make up for lost time by doubling up on her savings. Instead of 10 percent of her income, she goes on an austerity budget and saves 20 percent for the final 10 years of her career. Ten long years of scrimping pennies increases her final savings by 14 percent in total, from $711,015 to $807,763. That’s a $96,748 improvement, but the cost was huge.
But maybe there is a better way, one that might be simpler than you think.
In this example, Brenda’s annual salary was $59,000 three years ago. Two years ago she received a 2 percent raise (to $60,180 annually), and one year ago she received another 2 percent raise to $61,383.60 annually. Assuming these constitute Brenda’s highest three years of salary in the HAS calculation, her monthly HAS is then:
($59,000 + $60,180 + $61,383.60) ÷ 36 = $5,015.66
If Brenda works just one more year after receiving another 2 percent increase, her HAS then becomes:
($60,180 + $61,383.60 + $62,611.27) ÷ 36 = $5,115.97
By working an additional year, what was the lowest year in Brenda’s HAS calculation dropped off completely, and each year in her HAS calculation is 2 percent higher than if she retired now. She also saves whatever money she would have drawn from her retirement funds during that year. Assuming she has 35 years of service, Brenda’s adjusted outcomes are:
Retiring now: HAS x (# of years of service) x 2.5% = $5,015.66 x 35 years x 2.5% = $4,388.70 per month
Retiring one year later: $5,115.97 x 36 years x 2.5% = $4,604.37 per month
The bottom line: Between savings, investment income, and an increased pension annuity, Brenda has put herself in a much better place for a comfortable retirement. From this example it is clear that the most effective way to increase your retirement income late in your career is to keep working.
That may sound unappealing if you have grown tired of your job, but there are ways to change that perception—for example, by using your last five years before retirement to plan and reshape your prospects. If Brenda had used that time to expand her professional interests and skills, as opposed to simply running out the clock, maybe she would end up earning a little more money and seeing the extra year of work as a bonus year or a victory lap that caps a rewarding career.
In the next part of Financial Follies, we’ll look at strategies for finding an “encore job” that you’ll enjoy.