Carol Friery thought she was doing everything right. The warehouse manager loyally stuck with the same company for 17 years, contributing 10% of her income to her 401k and avoiding credit card debt.
Then the company announced it was closing the Rhode Island warehouse where she worked, and Friery was laid off at age 58. Now, after 18 months of fruitless job searching, Friery believes she's involuntarily retired.
"I've applied anywhere and everywhere," said Friery, who lives in Somerset, Mass. "I've applied in my field and out of my field. . . . I thought I was doing OK with retirement planning and savings, but I didn't expect this."
Americans increasingly are working longer, but Friery is part of a significant countertrend: older Americans who lose their jobs and can't find replacements, forcing them into early retirement.
The unemployment statistics are grim for those over 55. The typical duration of joblessness is nearly 30% longer than for younger workers, and half of those who lose their jobs are still looking for work six months later.
| All workers | Ages 16-24 | Ages 25-54 | Ages 55 and up | |
|---|---|---|---|---|
Percent unemployed 27 weeks or more | 39.3% | 28.5% | 41.3% | 49.1% |
Median weeks unemployed | 19.6 | 14.4 | 20.6 | 26.7 |
Average weeks unemployed | 29.3 | 23.3 | 30.3 | 35.5 |
Source: Bureau of Labor Statistics, February 2010
As unemployment benefits run out, many of those who are eligible decide to apply for Social Security benefits. An unexpected surge of new Social Security applications threw the system into the red this year, six years earlier than expected.
Taking Social Security benefits early comes at a cost, because the benefit check you get at 62 is 25% less than what you'd get if you waited until age 66, the current full retirement age for those born between 1943 and 1954.
Many looking to delay retirement
That's not the only reason Americans are trying to delay retirement, experts say. The proportion of people 55 and older who are still in the work force has grown from 29% in 1993 to more than 40% today for a variety of reasons, including:- The switch from traditional pensions to defined contribution plans such as 401k's, which shifted responsibility for retirement from companies to their workers.
- The dramatic reduction in companies offering health care benefits to early retirees and the need for workers to obtain employer-subsidized health insurance.
- An expressed desire among baby boomers to remain in the work force longer for social and emotional reasons as well as financial reasons.
Of course, baby boomers assumed they'd have a choice. Even before the recession, though, many older workers wound up retiring before they'd planned. A 2007 study (.pdf) of retirees by the Employee Benefit Research Institute found that 37% were forced into retirement before they wanted to quit, often because of health problems (28%), layoffs (28%) or caring for a family member (25%).
Friery had planned to retire at 62, which would have given her four more years to make retirement contributions and for her 401k to recover from the market downturn.
She knows she's luckier than many. Rhode Island's unemployment compensation is one of the most generous in the country, replacing 50% of her income and lasting 79 weeks. Friery's husband, a self-employed general contractor, has been able to continue working full time at age 67. Her company extended her COBRA health insurance coverage for two years. She hasn't had to tap her 401k or other savings yet.
But Friery's unemployment pay runs out in a few weeks, and her COBRA coverage ends in December. She can get a new health policy in her home state of Massachusetts -- which requires insurers to cover everyone -- but she expects to pay a lot more for much less generous coverage, and she'll need to dip into her 401k to pay for it.
"I am terrified," Friery said. "Before I lost my job, I thought I'd be doing OK in retirement. That's not going to be the case."
Living on $13,500 per year versus $33,500
Tapping retirement funds early can dramatically increase the chances a person will run out of money before the end of his or her life, particularly if it is done during a down market, financial planners say. That's because the cash taken out won't be there to earn future returns when the market fully recovers.To ensure the funds last, retirees typically need to withdraw less than 3% to 4% of their savings initially, and with a smaller nest egg, that can mean a substantially lower standard of living.
Here's an example. Someone who retires at age 65 with $500,000 saved in a balanced portfolio of stocks, bonds and cash initially could withdraw $1,625 a month with a 90% chance of having the money last until age 95, according to T. Rowe Price's retirement income calculator. Combined with the average Social Security check of $1,167, that could create a yearly income of about $33,500.
A worker forced out of the job market 10 years earlier, by contrast, could miss those last crucial years of making 401k contributions. The resulting smaller nest egg and longer expected retirement would substantially reduce the safe withdrawal rate. If she'd saved only $425,000 by age 55, for example, the recommended withdrawal would be just $1,118 a month, or $13,416 a year -- with no Social Security to supplement that income and no Medicare to help cover health costs.