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Some Surprisingly Good News About Retirement--Sort Of

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The Center for Retirement Research at Boston College isn’t usually the place to go for retirement happy talk.  Its National Retirement Risk Index classifies 52% of working age households as at risk of not being able to maintain their living standards when they stop working. Worse, it figures that if all workers had started out with the student debt the Millennials carry, 56% would be at risk.

But a new CRR issue brief  reaches a seemingly upbeat conclusion:  the vast majority of folks who retire aren’t being pushed out of the workforce by ill health, bad bosses, or age discrimination . Instead, they’re being pulled into retirement by the allure of spending more time with family and on other activities they enjoy.“People are being pulled towards positive things. That’s what keeps people at work or pulls them into retirement,’’  says Steven A. Sass, the CRR economist who wrote the new brief.

To the average reader that might seem like a “well, duh” conclusion.  Isn’t that the whole retirement warm and fuzzy dream? The reason you’re supposed to be saving now---to enjoy life and maybe do some good later?   (In the Forbes retirement guide, we've helped feed that dream, featuring the best places to retire to pursue your passions and celebrating executives who quit a career job to do something with social impact.)

Yes, but those of us wrapped up in the financial side of retirement planning tend to be perplexed by why people retire when they’re still able to work and when some fancy calculator shows staying on the job another year or two would substantially increase their odds of maintaining their living standards through old age.  And it’s not just the calculators, which many workers don’t run, or choose to ignore.  While average retirement ages have been rising for the past two decades, many workers continue to retire before they themselves say they plan to.  Yet the “external shocks’” economists can measure--bad health, job loss, etc.—explain only a small fraction of those earlier-than-planned departures, other CRR economists found in a paper published last year.  Something else is going on.

For the new brief, Sass tallied up responses from the long running University of Michigan Health and Retirement Study, which tracks 20,000 people over age 50, surveying them every two years on their health, work status and finances. Recently retired respondents were asked to select which of these were very important reasons they’d left the labor force: poor health; not liking work; a desire to spend more time with family; or a desire to do other things.

After massaging the results so they added up to 100%, Sass found that 69% of those retiring at age 65 to 67 were pulled into retirement---38% wanted to spend more time with family and 31% had other things they wanted to do. Just 30% were pushed into retirement---21% because of ill health and 9% because they hated their jobs.  Only among those who retired very early (that is age 59 to 61) was a negative reason tops; 38% had retired early for health reasons.  But only 5% of these very early retirees had left their jobs because they disliked them, meaning positive pull reasons were still dominant in the retirement decision. (For more details, see the graphic above.)

Could it be, despite all those stories about how to survive a younger abusive boss (10 tips here on doing it),  baby boomers don’t really detest their jobs? In the HRS study, Sass notes, 90% of still working older folks agree or strongly agree  with the statement “I really enjoy going to work. ’’

Sass points to another study of the retirement plans of University of California workers aged 55 and older to bolster his conclusion that people are deciding on work versus earlier retirement based not on finances, but on where they think they’ll be most fulfilled.  In that survey, both those who planned to retire earlier than average (63 or younger), and those who planned to retire later than the norm (67 or older), agreed working longer provided more financial security. (Again, duh.)  But those who planned an early departure thought the objectives of “personal growth” and “meaningful relationships” were more likely to be achieved in retirement, while those who planned to stay on the job were more likely to say those very same goals could be best achieved at work.

In fact, Sass notes, those who continue to work past normal retirement age “have more money than anybody else.” Yes, working longer makes them even more financially secure, but they’re not staying on the job because they fear penury. They stay on the job because they find it more personally fulfilling than they believe retirement would be.

Here’s a surprising insight: the role financial considerations play in the decision of when to retire could even be shrinking.  That seems counterintuitive, what with concerns about retirement security only growing. But in the old days, when people had traditional employer-paid monthly pensions, they were often offered big financial incentives to retire early---incentives that pushed them out of the workforce on a specific date, Sass points out.

In the age of the 401(k), by contrast, the financial incentives are usually to stay on the job.  Working longer gives you more time to build up your retirement nest egg and makes it easier to delay the age at which you claim Social Security. (You can claim your benefits anytime from age 62 to age 70 and waiting  eight years produces a 76% bigger check. While you don’t have to claim Social Security as soon as you retire, most folks do. )

But Sass describes those as “a much more amorphous set of financial incentives” than the old early retirement payout.  It’s hard for any employee to know when he’s really saved enough to retire or how much impact one more year of work will make. And anyway, what’s enough? Is it when you can make your monthly expense nut? When you’ve got a 90% probability of not outliving your money if you live until 90---as calculated by a Monte Carlo simulator which tests thousands of possible sequences of stock and bond market returns?  Or when you’re 95% sure you can handle the costs of living until 95, with the last three of those years requiring expensive private long term care?  (In which case, we’d almost all have to work until we dropped.)

All of which explains why Sass’ recent findings aren’t entirely good news---at least not as far as the retirement policy geeks are concerned.  It seems the amorphous financial benefits of working longer must compete against the beckoning non-financial rewards of retirement.  And that, Sass concludes “raises the prospect of many workers being pulled out of the labor force too early to gain a financially secure retirement.’’  Happiness? Try calculating that in your Monte Carlo simulations.