Get Used to a 'Working Retirement'

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The day of retirement reckoning is here for less happy reasons, too. For the second time in eight years, savers have watched in horror as their 401(k)s, 403(b)s, and other retirement savings were hit with sharp declines. This time around, the household wealth destruction is even greater because of the nationwide fall in home prices. For instance, from the last quarter of 2006 through the third quarter of 2008, the real value of homes and household holdings of stocks plummeted by $5.6 trillion, according to a recent report by Hoisington Investment Management Company in Austin, Tex.

Indeed, the current pension system is making everyday retirement insecurity worse. Employers have embraced defined contribution savings plans like 401(k)s. But such plans don't deliver a steady stream of income during one's golden years. There's also plenty of evidence that workers with access to defined contribution savings plans aren't taking full advantage of them, either.

But wait, there's more: The health insurance system is widely acknowledged to be broken and is a strain on family finances. Even with Medicare coverage after age 65, the elderly are finding it necessary to pay for a greater percentage of their overall medical bill.

The comedian George Burns used to get a laugh saying: "Don't stay in bed, unless you can make money in bed." It's no longer a joke. Many aging workers simply can't save enough to create a solid foundation of savings that will maintain their standard of living in retirement.

Postponing Retirement

The solution: work longer. After all, earning a paycheck in your latter years can make a huge difference in retirement living standards. Pocketing even a slim income often allows retirement portfolios to compound over a longer period of time.

Take this calculation by economist Robert Shackleton of the Congressional Budget Office, which posits a married couple is in their early sixties earning $100,000 pretax a year. They'll need nearly $66,000 a year after taxes to replace 80% of their preretirement income. (The 80% is a standard rule-of-thumb when it comes to making this kind of retirement calculation.) If both retire at age 62, they'll receive more than $25,000 in total Social Security benefits and require a portfolio of at least $891,000 to generate the income they need to live the good life through their normal life expectancy. (The calculation comes from a paper written several years ago, so the Social Security numbers will have changed a bit over the years. Yet the basic calculation remains true.)

But if our couple waits until age 66 to retire, their Social Security benefits go up and the time they need to bank money shrinks, so $552,000 in savings will suffice. Retire at age 70? All they require is a portfolio worth some $263,000. And so on.

More than making ends meet, work is physically and mentally energizing. It keeps the mind active and dementia at bay. For many people, the workplace is a social environment, with birthday celebrations and coffee klatches. To be sure, you may want to say goodbye to your current officemates for the last time. But that doesn't mean you won't want to work.

Of course, not all senior citizens will be physically and financially healthy in retirement. Especially vulnerable are less educated workers. So are single-parent households. Both groups are far less likely to have a pension plan and own their home. And then there's the lingering problem of ageism: Some employers are still hostile to aging workers with sagging middles and graying hair.

Nevertheless, the recession has made it clear that retirement and work will be weaved into a new cloth for many in the U.S. The challenge for all of us—employees and employers—will be making the best of the situation.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.