Archives for September 7, 2019

Japan has one of the highest old-age dependency ratios but not one of the highest retirement income replacement ratios. That could spell trouble for its citizens, now and in the future.

The old-age dependency ratio measures how many people there are over 65 years old to those who are between 20 and 64 years old. In Japan, the ratio was 46% in 2018, compared with 23% in the U.S. and 14% around the world, according to the World Bank.

Japan has a pay-as-you-go pension system, similar to many other countries around the globe, including the United States. Fertility rates and life expectancy are also key factors to consider when projecting the future sustainability of the program, but the fertility rate in Japan has dropped since the 1970s, while life expectancy has grown during the same time, according to the World Bank.

To ensure retirement security, the Japanese should weigh other means of retirement income — something they’re slowly beginning to do. The pension system replaces about 35% of preretirement income, compared with 38% in the U.S. But many Americans also rely on other sources of income, such as a 401(k), which drives the replacement income ratio to 71% on average, said Hervé Boulhol, senior economist of pensions and population aging at the Organisation for Economic Cooperation and Development. Comparatively, with voluntary savings, the Japanese’s replacement ratio goes up to 58%, which is still relatively low. About half of the working population in Japan are covered by such a plan.

The country has slowly been integrating its own version of a voluntary individual retirement plan, following the path of the United States. The country passed legislation to increase funding requirements and introduce defined-contribution plans beginning in 2001, in an attempt to bolster retirement and economic security, according to a report published in the U.S. National Library of Medicine. These individual retirement accounts have become popular among the Japanese, some of whom are aware the government may have trouble paying out benefits, the Japan Times reported.

The old-age dependency ratio doesn’t have to mean doom, said Paul Irving, chairman of the Milken Institute Center for the Future of Aging.

The ratio assumes productivity drops after the mid-60s, and that older populations need to retire — but that’s not true, Irving said, and such an assumption can be dangerous to society. Prolonging a career and remaining in the workforce is not only healthy for many people, but it could deter a pension system from faltering because of the influx of older people claiming benefits. “The dependency ratio places a cloud over the kind of creativity, opportunity and possibility that exists to reimagine what a workforce and population of the future will look like,” Irving said.

Experts often recommend saving up $1 million before you retire. While many people are able to live on much less than that, for others $1 million may not be enough, thanks in part to longer life expectancy and disappearing pensions. At the same time, many financial planners also suggest saving anywhere between 10% and 15% of your gross salary.

But to be able to comfortably save while also building a multi-million-dollar retirement fund, you’d need to earn a substantial salary. In most situations, that means bringing in far more than $61,372, the median household income in the U.S.

Below, CNBC calculated the amount you need to earn annually in order to save $2 million by 65 by putting 10% of your earnings into investments.

If you start at age 25:

• With a 4% rate of return, you need to earn $202,378 per year and save $1,686.48 per month (exceeds the $19,000 annual limit on 401(k) contributions)
• With a 6% rate of return, you need to earn $120,513 per year and save $1,004.27 per month
• With an 8% rate of return, you need to earn $68,748 per year and save $572.90 per month

If you start at age 30:

• With a 4% rate of return, you need to earn $262,659 per year and save $2,188.83 per month (exceeds the $19,000 annual limit on 401(k) contributions)
• With a 6% rate of return, you need to earn $168,455 per year and save $1,403.79 per month
• With an 8% rate of return, you need to earn $104,626 per year and save $871.88 per month

If you start at age 40:

• With a 4% rate of return, you need to earn $466,808 per year and save $3,890.07 per month (exceeds the $19,000 annual limit on 401(k) contributions)
• With a 6% rate of return, you need to earn $346,323 per year and save $2,886.03 per month (exceeds the $19,000 annual limit on 401(k) contributions)
• With an 8% rate of return, you need to earn $252,359 per year and save $2,109.99 per month (exceeds the $19,000 annual limit on 401(k) contributions)

For context, the average American’s 401(k) plan grew at a compound annual average rate of 14.2% between 2010 and 2016, according to a study of more than 6 million accounts by the Employee Benefit Research Institute, a nonprofit based in Washington, D.C. Of course, there’s no guarantee of similar growth in the future.

Keep in mind that these numbers don’t take into account the many ups and downs you may experience over your lifetime, including periods of unemployment or sudden financial windfalls or losses.

It’s also important to consider how pay increases will affect your savings over time. If you consistently put away 10% of your income, the actual amount you contribute each month will grow as your salary rises, which can help you build up your retirement fund more quickly.

Even if you don’t earn much now, save what you can and work your way up to 10 or 15%. As your salary rises, increase your retirement contributions as well. If you’re aiming for that $2 million, you might need to consider contributing even more than 15% of your income, depending on your salary.

A good place to start investing for retirement is your employer-sponsored 401(k) plan. You should aim to contribute at least enough to earn any company match, which is essentially free money. If your company doesn’t offer a 401(k) or comparable plan, or you max out your 401(k) for the year, you can still save for the future. Look into other retirement savings vehicles that offer tax benefits, such as a Roth IRA, traditional IRA and/or a health savings account. Beyond tax-advantaged account, you should also consider a brokerage account.

Remember: The most important factor in building a well-funded retirement account is to start saving and investing as much as you can as early as you can. You want to take advantage of compound interest, which is when any interest earned then accrues interest on itself.

No matter the amount you’re contributing, the earlier you’re able to start socking money away, the bigger the boost the stock market will give you.

For years, many workers nearing retirement have professed plans to work part-time during retirement. But few retirees have actually continued working part-time. Things are changing.

A recent survey of pre-retirees and retirees shows that the gap between planning to work in retirement and doing so has narrowed. I have to confess I was a little bit surprised and more than a little pleased to see the results. Let me share with you what the researchers found and what retirement analysts say is going on.

Findings of a Survey of Retirees and Pre-Retirees

The LIMRA Secure Retirement Institute surveyed recent retirees and pre-retirees (ages 55 to 71) who’ve retired within the past two years or plan to retire in the next two years and had at least $100,000 in assets. Among the pre-retirees, 27% said they plan to work part-time in retirement and 17% said they expect to gradually reduce their hours before stopping work entirely. Among the retirees, 19% are working part-time and 17% have reduced their working hours.

The study found an interesting gender distinction, too: a quarter of the female recent retirees phased into retirement, while just 16% of male recent retirees did. Men may be less likely to phase into retirement than women because it’s harder to do so due to their pre-retirement job functions, the LIMRA researchers noted; 23% of the retired men surveyed worked in managerial job functions before retirement compared with 13% of women.

There are, I think, three big reasons why previous studies showed a much higher percentage of pre-retirees planning to work in retirement than the percentage of retirees who were working part-time.

First, pre-retirees have been overly confident and optimistic about their desire or ability to work part-time in retirement. Second, health challenges frequently prevent retirees from working in retirement. Third, people in their 60s and 70s have typically had a hard time getting hired due to age discrimination.

So, what’s going on now?

“The numbers are in good alignment because the pre-retirees were two years or less from retirement. So they had a pretty good idea what they were going to be doing,” said Alison Salka, director of LIMRA and LIMRA Secure Retirement Institute Research. “The closer you are to retirement, the more accurately you can predict what you are going to do. You’re also more likely to have been planning for it.”

Why People Work Part-Time in Retirement

Salka said the top three primary reasons for continuing to work among employed recent retirees are: for spending money, because they enjoy their work and to stay intellectually engaged.

Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies (and a Next Avenue Influencer in Aging), told me she found it “encouraging that the gap between pre-retirees’ vision of transitioning into retirement compared with the experience of recent retirees is finally starting to close.”

Working at least part-time in retirement is a good thing for many retirees, Collinson said. “It enables them to earn income, continue saving for retirement and bridge savings shortfalls — with more free time for personal pursuits,” she noted.

The Savings Shortage

Many 50+ workers haven’t saved enough to fully retire at the traditional retirement age of 65, Collinson explained. According to Transamerica, the estimated median total household savings in all retirement accounts among the semi-retired is $216,000. “It will be difficult, if not impossible, to make these savings last a retirement of twenty-five or more years,” Collinson said. And with every passing year, the percentage of retirees with pensions is shrinking, adding to the need by some new retirees to work part-time.

Collinson’s theory on why the working-in-retirement gap of wish and reality narrowed in the LIMRA report: “The labor environment is becoming more conducive to workers extending their working lives and pre-retirees planning a transition to retirement.” In today’s tight labor market, employers are increasingly hiring older Americans to work part-time in retirement.

The Gig Economy and Retirees

By 2026, the Bureau of Labor Statistics estimates, the labor force participation rate of Americans age 65 to 74 will grow to about 30%, compared with roughly 17% in 1996.

“With the proliferation of the gig economy and the digital marketplace, it’s easier than ever for experienced professionals to do freelance and consulting work, although it still requires careful planning and preparation,” Collinson said.

Bingo.

In fact, demographer Peter Francese recently told Barron’s that he believes the current figures on boomers in the labor force are understated. Many people in their 60s and 70s, he said, are working part-time off-the-books, so they’re not counted in the government’s labor force figures.

Advice for Working Part-Time in Retirement

My bottom line: if you plan to work in retirement, don’t wing it.

You need to start planning a few years ahead of time. You might need to add some employment skills, or at least keep yours up-to-date.

It’s a good idea to network with people you know at employers where you’d like to work in retirement and that hire part-time workers.

If you want to start your own business as a consultant or launch an entrepreneurial effort, you’ll want to gear up gradually by doing your market research, getting financially fit and laying the necessary groundwork. (Shameless plug: My new book on midlife entrepreneurship, Never Too Old to Get Rich, includes stories of people who’ve launched businesses as their second acts, with their advice for others.)

Next Avenue also has many stories on working part-time in retirement, including this blog post I wrote, “How to Keep Working Into Your 60s and Beyond.” The RetirementRevised.com podcast, Working After 50, has been running a series on the subject, too.

As an entrepreneur, your work is such a big part of your life that it may be hard to imagine not doing it. But if, like many people, you are planning to keep working past 65, a recent study from Boston College’s Center for Retirement Research (CRR) may give you pause.

“The share of workers reporting that they expect to work past age 65 rose from 16 percent in 1991 to 48 percent in 2018,” write the authors. “But such intentions often go awry.” In fact, the same study reveals that 37 percent of all workers retire earlier than they had planned. (Other studies suggest that number is much higher.) The three main reasons CCR points to are unexpected changes in health, employment or family circumstances, in addition to looking at the impact of major financial shocks late in life.

Although entrepreneurs pride themselves on being self-sufficient and independent, they are not immune to these circumstances, so let’s drill down into them a bit further.

Health Shocks 

You may be forced to retire early due to existing health conditions, such as arthritis or other chronic conditions that worsen over time. Or maybe you are in good health at age 55 and plan to work till 67 to increase your savings, but then develop major health problems unexpectedly that force you to stop working sooner than you had hoped.

Employment Shocks 

Individuals may lose a job due to a layoff or business closing and not be able to find new employment. Or they may find another job only to discover it is not a good fit and be forced to quit. If you own your own business and have planned properly, this one probably doesn’t apply to you. However, if you are a solo entrepreneur depending on a few major clients who no longer need your services, you may find yourself in the same boat with laid-off older workers.

Family Shocks

This can include a spouse’s employment or retirement, changes in marital status, having to care for a parent or grandchild or other upheavals that make it unrealistic to keep working. These can and do happen to anyone and often upset the best-laid plans.

Financial Shocks

These are defined as large fluctuations in a person’s wealth. The CCR study looked at initial financial wealth (the sum of assets held in stocks, bonds, CDs and other types of financial accounts) minus debt at the individual’s planning age. Financial shocks don’t play a significant role in forced early retirement for most people, the study notes. However, if you own a business and experience a major financial shock later in life, you may be forced to close and stop working sooner than you had planned.

Fortunately, there are steps you can take to help plan for an uncertain future, including operating under the assumption that you will have to retire early; saving more each year (10 to 17 percent of income just for retirement, according to the Stanford Center on Longevity); and not risking what you can’t afford to lose. That last one can be tricky one entrepreneurs who are comfortable and accustomed to taking chances, but gambling with your retirement savings via stocks and other volatile investments can be a recipe for disaster if markets collapse just as you are preparing to retire. This is one reason why it is so important to diversify. 

You’ve heard the disclaimer, “Past performance is no guarantee of future results.” This is certainly true when it comes to how long you plan to work. You can’t avoid all the shocks, but you can take steps to cushion the blow. Start by saving a big chunk of your retirement money where it’s guaranteed to be safe against market risk and where you’ll get competitive growth. One guideline is the “Rule of 25,” which states that you multiply your total annual expenses by 25 to determine how much you’ll need to have saved by the time you retire.

And to paraphrase another oft-invoked saying, hope for the best and plan for the worst, because when it comes to deciding when to stop working, you may have that decision made for you by circumstances beyond your control.