Retirement Funding Risk & Working Longer as “Plan B”

Retirement Funding Risk & Working Longer as “Plan B”

September 05, 2014

Our post for The Fiduciary Advisor briefly discussed funding risk and the fact that most Americans do not adequately contribute to their retirement plans. Funding risk is simply the risk of not having enough money with which to retire. Your contribution rate is very important, but your growth rate, and distribution rate when you eventually stop working, also factor into the equation.

Not long ago, the majority of private sector employees had a defined benefit pension with a professional manager who made sure your retirement was well funded. Now corporate pension funds are rare, and the responsibility to manage retirement risk has been passed on to you. If "plan B" for paying for retirement is to just work longer, we recommend that you thoroughly review the risks of the job market over the next 20 years and beyond.

Global risks faced by workers 50 and over

The workforce is changing. We are now in a global marketplace for labor. What this means is that U.S. workers have to compete with an increasingly educated global workforce. Working in retirement may very well work for you. But then again, here are some additional risks against which employers are often evaluating workers who are 50 years old and over:

  • Compensation risk. They have more experience, but are we willing to pay higher salaries to obtain it? How much will older hires cost our benefit programs?
  • Skills risk. Are their skills keeping up with our increasingly technology-driven world?
  • Retirement risk. Should we hire and invest in this new employee who may retire soon?

Computerization increasing risks

On top of globalization, we face increasing competition in the workplace from technology. As we've mentioned before, a recent study on the future of employment by two professors at the University of Oxford Martin School estimates that 47% of U.S. employment is at risk of being replaced by computerization over the next 20 years. Even jobs that were once assumed to require a human are now at risk of being replaced — a truck driver for example. Think of Google's driverless car and Amazon's drone delivery tests. This article in The Economist did a good job of summarizing the report and the professions that could be most at risk.

The bottom line — Plan now to minimize funding risk

So what's the bottom line? Working during retirement may be wishful thinking for a great many retirees. Working longer may or may not work for you. Planning to minimize the risks is essential. Decide how you will make up for any shortfall as far in advance as possible, if you haven't already. It's never too late to create a thorough financial plan. For ideas on how to get started, view our Fiduciary Financial Planning webinar or contact us. To keep in the loop on every Fiduciary Advisor blog post as it's published sign-up for blog post email alerts. To keep in the loop on every post as it's published, sign-up for blog post email alerts.