From the August 2007 issue of Investment Advisor • Subscribe!

Working Through Retirement

Retirees are putting in extra hours to save for healthcare

Are your clients putting away enough money for retirement or will they be working at the age of 70 to cover healthcare costs? According to a Boston College Center for Retirement Research brief by Leora Friedberg, an assistant professor of economics at the University of Virginia, and a research associate of the Boston College Center, the trend toward earlier retirement, which has persisted from the late 19th century well into the late 20th century, has not just leveled off, but has started to reverse. Released in March 2007, the brief reveals that the average retirement age has "flattened out," prompting a debate among researchers as to whether the trend toward earlier retirement has stopped or just paused.

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One train of thought posits that the trend has stopped due to economic, policy, and demographic changes, such as a diminishing dependence on Social Security and traditional pension plans. The other side stresses that long-run growth in incomes and the desire for more leisure suggest only a pause in the trend. A U.S. Census Bureau Current Population Survey on labor force participation rates by age and gender from 1950-2006 shows a general decline in men's (aged 55+) labor participation rates through 1980, but that rates stabilized in the 1980s and early 1990s, and since then have begun to reverse. For women, a similar pattern exists at age 65 and older, though women aged 55-64 have increased their labor participation since 1990. Among men aged 65 and older, participation rates lingered at about 15% from 1984 until 1999 and then started rising gradually, reaching about 20% in 2006. Women in the same age range stayed below 10% through the early 1990s, rising to 11% in 2006. For men aged 55-64, participation rates rose from about 65% through the late 1990s to about 70% in 2006. For women aged 55-64, the rate remained just over 40% from the 1970s through the late 1980s and then rose steadily, reaching 58% in 2006.

According to the brief, some evidence suggests that jobs have grown more flexible for older workers, as those workers tend to take more part-time jobs while in retirement. This increase was particularly prominent among educated and well-off workers, suggesting an increase in demand for job flexibility. However, the brief also links these changes in retirement age with "increased uncertainty about the future economic environment surrounding retirement," including the future viability of Social Security and potential benefit reductions, the risks associated with the shift from defined benefit to defined contribution pensions, and long-term care costs. This rise in uncertainty may require people to delay retirement in order to work and save more.

The Healthcare Cost Issue

A February 2007 brief from the Boston College Center by Richard Johnson, a research associate of the Center for Retirement Research and a principal research associate at the Urban Institute, examines the availability and cost of health insurance coverage for workers aged 55 to 64, and coverage after retirement.

Retirement often disrupts health insurance coverage, since most workers rely on their employer for these benefits, and many firms are cutting retiree health benefits by passing more costs on to retirees or eliminating benefits altogether. "As healthcare costs rise, the workforce ages, and global competition intensifies, many employers seem to be concluding that they can no longer afford to offer subsidized health insurance to retirees," the brief reads. In fact, between 1994 and 2004, median contributions by retired employees more than quadrupled--after adjusting for inflation--for adults aged 55 to 63 enrolled in health plans offered by their former employers, according to the University of Michigan's Health and Retirement Study. The average monthly retiree contribution was $111 in 2004, up from $25 in 1994. Even so, retirees with health benefits provided by a previous employer continue to pay much less for their coverage than those who purchase insurance in the private non-group market. According to the brief, the average monthly premium paid in 2004 by adults, ages 55 to 63, with private non-group insurance totaled $278. Certainly, even if retiree health plans continue at their current levels of coverage, rising healthcare costs will force future retirees to allocate an ever-increasing piece of their income to healthcare.

A third Boston College Center for Retirement Research brief suggests that retirees are using another option for healthcare costs. About three-quarters of those surveyed said they do not plan to tap into their home equity for ordinary living expenses, but nearly half of the same three-quarters said they would use it as a last resort for nursing home care or other health emergencies. (The full brief on home equity and healthcare, along with the other research briefs, is available in the Web Extras section.)

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