We are eight years into a strong bull market in stocks, with rising employment and the highest consumer confidence readings we’ve seen in a long time. On top of that, we also are in the middle of a wave of Baby Boomers hitting their mid-sixties, the classic retirement age. Those factors combine to see some of the highest retirement levels we have ever seen, which means more people will walk away from the workplace permanently in 2017 than ever before.
If that’s you, have you thought much about what life will look like once you’ve left work behind? What will you do with your time? Who will you socialize with, and most importantly, how will you find a “sense of meaning” outside the office? With all the time and effort we spend to save and build towards our retirements, isn’t somewhat ironic that a large portion of us will eventually “fail” at retirement? That is to say, a significant number of those who put away their proverbial workboots will find themselves digging them out again at some point in the future.
From our experience, this can be for a variety of reasons, many of which are not related to financial concerns. Instead, while it may be hard to believe for workers stuck in the perpetual stress of the workplace grind, we often see retirees return to work simply due to disillusionment with the retirement lifestyle. Once the initial feeling of “vacation mode” wears off, many retirees feel a stifling lack of direction, need to regain a sense of purpose, or simply want to change the social dynamic they find themselves in on a daily basis.
And the data seems to back this up. A quick glance at the labour force participation rate for Americans 65 and older (see below) over the last 30 years shows a steady trend upward. This means that retirees are returning to work, and have been for decades. But there may also be evidence that this trend is not simply due to a lack of retirement savings. A recent Washington University study of retirees over a ten year period found that “surprisingly, total household net worth was not significantly related to un-retirement … people in debt or poor were just as likely to return to work as people who were wealthy.” In addition, the study found that retirees that are healthy and highly skilled in the workforce (regardless of their income or net worth) are more likely to return to work.
Why Failing at Retirement Can Hurt You Financially
For those who have to go back to work later in life for financial reasons, obviously finding a job again is a challenging proposition. Ageism in the workforce is alive and well, and many employers would rather train a younger employee at lower cost than hire a senior citizen that may go back to retirement in a few years anyway.
With that said, even if you can find employment easily after retirement, formally retiring and then “un-retiring” can still hurt you financially. Beyond the obvious loss of skills from being out of the workplace for years, there are many financial decisions around retirement that, once made, are difficult if not impossible to be undone. For example, Social Security benefits taken early may be reduced or even eliminated if your earnings from work exceed certain thresholds. In 2017, that limit is only $1,410 per month for workers under age 66. In addition, filing for Social Security early and then returning to work could mean that you forever lose access to some ancillary Social Security claiming strategies, such as filing a restricted application for spouse benefits and then later switching to your own.
Reaching Financial Independence is Just the First Step
At JPH, we help clients plan for retirement in such a way that, at the very least, the reasons for returning to work are not financial in nature. We often talk to clients about the concept of “financial independence,” which is simply the condition of having the financial resources to choose whether or not to pursue work.
Take the obvious example of Bill Gates. When he retired from Microsoft as one of the world’s richest men, he had no financial reason to go back to work. Clearly, he could have sat at home and watched tv all day for the rest of his life, with no effect on his financial security. However, Bill and his wife Melinda do still work in their foundation. They are an extreme case of financial independence and yet they both still work arguably as much now as before. In fact, Bill actually quit playing golf when he retired, arguing that “it takes up too much time to get any good at it.”
You don’t need to be a billionaire to achieve financial independence. All you need is enough assets or income to cover the cost of the lifestyle you’re comfortable with. Sure, that’s easier said than done, but it’s not impossible. In fact, we have helped hundreds of people to reach that exact condition, and none of them were billionaires. Once you do reach financial independence, though, you have a new challenge: to find a reason to jump out of bed each morning, even though there’s nothing that says you have to. So the question remains: how do you keep from “failing” at retirement?
Understand that this is a Major Life Transition
“Retirement is a major stressor on relationships, because people are so preoccupied with setting up the financial bedrock of retirement that they don’t think about interpersonal challenges. They don’t think about the lifestyle change.” — Robert Bornstein and Mary Languirand
One of the biggest changes the new retiree faces revolves around his or her social environment. Psychologist Robert Bornstein and his wife Mary Languirand, also a psychologist, discuss the stress that retirement puts on a relationship in their book, How to Age in Place. They point out that couples often go from being together two to three hours a day to being together 24/7. “Even if you love this person dearly, you are not used to being that close all the time.” That much change can put a strain on any relationship, so it’s best to approach the transition with at least an awareness of how it may affect each other. Having an awareness helps generate empathy, which in turn will increase patience with each other as you cope. But it’s not just your relationships that will go through transition, many people do not realize how important their “sense of meaning” (which often comes from their work) is to them. Losing the admiration and appreciation that many careers provide can be a jarring experience unless you know that it’s coming and find ways to replace that void.
Communicate with Those Most Important to You
Along with understanding that this is a district phase of life with its own challenges, communication is crucial for a successful transition. We find that clients who actively plan their finances together (with the help of a fiduciary financial advisor) have a higher chance of successfully completing the transition smoothly. A shared understanding of the financial situation helps to form a mutual starting point for discussions on more nebulous lifestyle concerns, such as what hobbies or community activities each partner will participate in. In fact, the very act of planning the financial side of retirement will force important lifestyle conversations.
Sometimes couples have very different ideas of how retirement will look, and just assume their partner is on the same page. For example, maybe he just craves the peace and quiet of a cabin by the lake, while she hopes to move closer to the kids. An even more basic question is if couples will retire at the same time. While it is often assumed that this will be the case, according to a Center for Retirement Research study, less than 20 percent of couples actually do.
In addition, it’s important that other people around you understand the transition you are currently going through. Take your children out to lunch one on one, and just talk generally about your hopes and aspirations for the next chapter of your life, without piling pressure on them to be more involved in your life unless they want to. This will allow them to be more supportive and understanding of your situation, and hopefully prevent some misunderstandings that can be sometimes built on unwarranted assumptions.
Have a Plan, but Don’t Be Afraid to Be Spontaneous
Having a financial plan is crucial, and so is having a basic idea of what lifestyle you would like to have. That being said, don’t be afraid to change course and don’t lock yourself into a lifestyle before trying it out. Many retirees feel like they have to “buy their last car” and do “all the repairs to the house that it will ever need” before retirement. At the core of that is fear that they may not have the income to do those things once the paycheck is gone away. However, financial independence means that you have the financial means to replace your current lifestyle, which includes being able to buy new vehicles when the old ones wear out. That need doesn’t somehow magically go away when you reach retirement. A better course is to figure out what it costs to live your life comfortably before retirement, and then seek to replicate that income level in retirement itself.
Once your plan is in place, and the projected retirement income is sufficient to meet your needs, I recommend having a loose plan for your retirement lifestyle, but leave some room for spontaneity. For example, we have clients that are absolutely convinced that the current home is one they will entertain their grandkids in, and eventually die in. That’s fine, but what if your children’s jobs take them across the country? With a big empty house, will you still stay in it forever? Others are convinced that they will move to some exotic beach locale, and go ahead and buy a condo there without trying out the lifestyle first.
Our encouragement is to take baby steps into this transition as much as you can before you jump in headfirst. That goes for both big financial and lifestyle decisions. Remember that most statistics tell us that there is a high probability that at least one spouse will live to age 90 or longer. Retirement can be a long time, so give yourself time to try things out before rushing in headlong.
It is possible to “fail at retirement” even if you have plenty of money. So before you tell your boss and coworkers that you’re leaving, take some time to reflect on the transition you are about to go through. Then talk it out with your spouse, friends, and family. Last, make sure you have a plan, but leave some room for changes in case things don’t go as you expect. Retirement is a major phase of life, one that is full of adventure and challenges all its own. Take some time, talk to your Personal CFO and financial advisor, and make sure its the best time of your life.