January 16, 2022 — A significant number of workers underestimate their financial needs in retirement, and that includes calculating how much they will receive from Social Security. As a result they often retire too early and start taking their Social Security before they maximize their benefit. The end result is that they face an income shortfall in their retirement years. A new study from the Boston College Center for Retirement Research has concluded that taking a non-traditional job late in one’s career can help retirees avoid a serious shortfall in replacement income, and thus have a more comfortable retirement. Replacement income is defined as the ratio of a worker’s retirement income to pre-retirement income.
The study, “Does Late-Career Nontraditional Work Improve Retirement Security?” by Matthew S. Rutledge and Gal Wettstein followed 3 groups of 61 and 62 year olds were working in traditional careers. One group continued to work, one retired, and the other took some type of nontraditional job without benefits. The nontraditional jobs lacked health and retirement benefits, but did allow older workers to prolong their employment, and increase lifetime earnings for Social Security and retirement. The authors questions wondered if workers in traditional jobs at 62 who are underprepared for retirement are more likely to switch to nontraditional work, and whether it helps. The results could come up with any evidence that they are more likely to switch, but those who did switch closed much of the gap in their retirement security by age 68.
The researchers define nontraditional as jobs in the gig-economy, on-call work, temporary, part-time, and/or self employment. These jobs did not include health insurance or retirement benefits.
The major conclusion from the study is that underprepared workers who shift to nontraditional jobs can significantly improve their retirement security by age 67 or 68.
Traditional and nontraditional work boost financial preparedness by about the same amount. The researchers found that both surprising and encouraging. They weren’t quite sure why the nontraditional jobs helped about the same as those staying with their traditional careers, but one thought was that both groups realized they faced a retirement shortfall and thus took steps to improve their situation.
One discouraging lesson from the research was that it was unclear that underprepared workers will take on nontraditional jobs. But those that do improve their replacement income ratio.
No one has a good excuse for not knowing what their Social Security benefit will be. True, your working days might end a few years before you intended, but by your late 50s the die is pretty well set – your benefit will be calculated on the basis of your 35 highest earning years. Various Social Security Calculators can estimate your benefit in a few minutes.
This study highlights that if it looks like your replacement income is going to run short of where it needs to be for a comfortable retirement, continuing to work or taking a nontraditional job for a few years can make up that shortfall. That assumes of course, that you are healthy enough to continue working.
Comments? Have you taken on or considered looking for a part time job in your 60s or 70s? If so, did it help you towards a more comfortable retirement? Please share your thoughts in the Comments section below.