Before we can start to address the many challenges in achieving retirement security, we need to define the goal. I define retirement security as:
“The accumulation of sufficient capital by a target retirement age to be able to buy a guaranteed, lifetime, inflation-protected retirement income payment that, in combination with Social Security and any employer-provided benefits, allows the person to maintain their desired standard of living.”
If your immediate reaction after reading this definition is “I have no intention of using all of my savings at retirement to buy a lifetime annuity so this is a fairly useless definition”, please read on. The purpose of this definition is not to assert that everybody should buy a lifetime annuity at retirement. Indeed, buying an annuity to cover 100% of retirement income needs is probably not the best strategy for most people.
However, if on your full retirement date you can afford to make such a purchase then you are definitely secure and that security gives you the freedom to consider a wider range of retirement paths. In contrast, if you have not achieved this definition of retirement security your choices will be more limited.
Why Does The Definition of Retirement Income Not Include Post-Retirement Earnings?
The latest Bureau of Labor statistics analysis of Civilian Labor Force Participation Rates by Age, Sex, Race and Ethnicity shows that the labor force participation rate among those aged 65 and older increased from 11.8% in 1990 to 12.9% in 2000, to 17.4% in 2010 and is projected to grow to 22.6% in 2020.
If an increasing proportion of people continue to work (or seek work) later into life should the definition of retirement security not allow for some level of earnings even after retirement?
Working after your target retirement date is not intrinsically bad, but there is a big difference between making a free choice to do some particular part-time work and being forced to work, often not in a job of your choosing, because of economic insecurity.
I have noticed that retirement advisers sometimes include “post-retirement part-time work” among their standard strategies for addressing an expected deficiency in future retirement income. One of the dangers in taking this approach is that it is very difficult today to forecast with any accuracy what employment might be available to a 65-70 year old “retired” person 20 or 30 years from now. Furthermore, with increased age comes a higher incidence of unexpected disability or serious illness, which could make it impossible to obtain paid employment.
Therefore, incorporating any assumption about post-retirement earnings into long-term retirement planning carries a high risk of facing an income shortfall at a time when it would be too late to take effective remedial action.
My view is that when planning for retirement we should aim to be secure by some target retirement date. After that date, income earned from optional work is a bonus but any forced work should be viewed as an unwelcome burden and not a normal retirement planning strategy. This means that an assessment of future retirement security should not include any assumed post-retirement income.
Furthermore, if the forecast indicates a possible shortfall in required retirement income, the affected person should take remedial action today and not simply assume that the shortfall can be closed by delaying full retirement and continuing to work either part-time or full-time for additional years.
Understanding Each Component
From the above definition, we can see that the key components of retirement security are:
- Expected Lifespan
- Target Retirement Age
- Post-Retirement Standard of Living
- Required Retirement Income
- Social Security Benefits
- Employer-Funded Benefits
- Capital Cost of Funding a Secure Retirement
- Retirement Capital Accumulation Strategies
We will be examining each of these components in detail in future posts.