Helping Clients Recover Their Retirements: Pt. 1

Advisers naturally concentrate their efforts on clients—usually those in late middle age and beyond—with sufficient resources to have meaningful choices about retirement. The sad fact is that only a minority of Boomers meet these conditions. Millions have very little in savings and no real idea when and how they can retire.

But even if they choose to keep working, they will have retirement thrust upon them imminently, due to health or economic surprises.

Previous columns have stressed the power of early action, when compounding offers the greatest leverage. This column is written for clients in their 50s or 60s who did not act, or whose planning was swamped by misfortune such as the 2008 crash, and are now seeking to recover their futures.

We will not insult your intelligence by claiming that the ideas below will fund your "dream retirement." It simply isn't possible to make up in a few months for decades of not saving. But they can help you begin the road to recovery. In particular, they offer some safety warnings about common mistakes that some desperate boomers make.

Delaying Social Security

Many pre-retirees have misled themselves by assuming that their retirement income needs will be met by Social Security, and by extension by other pension income such as your employer's pension. This is a dangerous supposition.

Social Security was designed to prevent poverty among the elderly, not to offer a middle-class income. Average payouts are less than 30% of average working incomes. If you have worked for an unusual number of years you may see slightly more than the average, but it will never be greater than about $35,000 per year. This is a gross figure, which will be significantly less if your benefits are highly taxed.

Pensions are a dying vehicle: Less than one in five private sector workers can expect a defined benefit pension. All pensions, including Social Security, are groaning under the weight of demographics. Their finances were designed in an era when workers contributed for 20 to 30 years, then received benefits in retirement for five to 10 years.

But because of lengthened lifespans, retirements can last for 30 years or longer. Most retirement plans are significantly underfunded (i.e., they have not amassed enough assets to pay out anticipated benefits). Social Security's fiscal condition gets a great deal of media attention, especially in election years, but many other government and private pension plans are in worse shape.

Finally, if the pension is offered by an organization that can legally declare bankruptcy, that declaration can allow the company to renounce their financial obligations, including cutting or eliminating pension payouts in toto. It is prudent to accumulate assets to replace at least part of the pension income you expect, because there is a good chance it will evaporate. (For private pensions there is some insurance up to certain low limits through the Pension Benefit Guarantee Corporation, which is a federal agency.)

The most common mistake retirees make is beginning to collect Social Security too early. The law establishes "full retirement age" (FRA) based on your year of birth (currently, FRA is about age 66; it extends by a few months each year.) If you begin collecting at that age, you will receive the monthly benefit estimated in the annual statement you receive from the Social Security Administration. But you can begin collecting benefits at a reduced rate as early as age 62. The math is straightforward: the SSA projects a total lifetime benefit for each recipient. If you start earlier, your monthly payment must be reduced to keep within that projected total benefit.

The same logic applies in reverse if you delay beginning collection: Each year of delay, up until age 70, increases your benefit— specifically by about 8% per year of delay. An 8% inflation-adjusted, risk-free return is unheard of in today's investing environment.

Many people who lost their jobs in their early 60s during the 2008-09 recession immediately filed to begin collecting Social Security. If this happens to you and you have no alternative, we sympathize and wish you well. But do not elect this option voluntarily until you have exhausted all alternatives.

Start planning by educating yourself about how Social Security works and your options for stretching your benefits. Register for an online account with the SSA. Choose your financial advisor in part based on his or her proficiency with Social Security or other pension options.

Work Longer

Unless you are forced into retirement, you have an active choice about when you stop working. We want to urge you to stay in the workforce a while longer, if you can.

Financially, the arithmetic is undeniable: Each year of work allows you to accumulate more assets, and decreases the length of time you will be decumulating later. Millions of boomers have been obliged to continue working (e.g., if their spouse was laid off in the recession), which is arguably unintentionally smart. But there are other, nonfinancial arguments discussed below.

First, leaving the workforce in your 50s or 60s is effectively irreversible. Regardless of legal sanctions, age discrimination is very real. Employers who are Gen Xers or millennials perceive boomers as being inflexible and unable to adapt to new technologies and business models. And even if you are able to become reemployed after "retiring," it will probably be at a significantly lower wage than before you retired.

For the past generation average incomes have been flat or declining; only a tiny fraction of workers at the top of the spectrum have made economic progress. Growing competition from 3 billion new capitalists—part of the new normal described in earlier columns—has suppressed wages in many middle-income occupations. If you can land a job, the one you secure is much more likely to pay near-minimum wage than your old, pre-retirement salary. If you are still working, chances are you have mastered the job's challenges; you are highly productive and can command a fair salary. You lose that edge in a new job.

Working longer also has health and longevity benefits. Numerous gerontological studies have shown that seniors who experience the mental challenge, social interaction, and self-esteem that comes from accomplishment at work are happier, healthier, and live longer. We understand that retirement may be forced on you by circumstance. Keeping your skills honed and contributing to your employer's success provide some protection. You can also make contingency plans to use your skills to be your own boss in an entrepreneurial venture if you are laid off from a salaried position. Being a freelance teacher, writer, or accountant can keep you active and employable and allow you to expand or contract your work effort at your discretion once work is no longer a financial necessity.

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Philip J. Romero, a finance professor at the University of Oregon, and Riaan Nel are authors of "It's the Income, Stupid! 7 Secrets for a Stress-free Retirement" (Post Hill Press, 2017).