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Why Are Clients Insisting on Working Beyond Retirement?

By Miriam Rozen December 11, 2018

Even when their wealth would allow them to retire comfortably, many financial advisor clients postpone leaving the working world.

“I do that speech all the time, telling people they have to enjoy life at 75,” says Ross Gerber, CEO of Santa Monica, Calif.-based Gerber Kawasaki Wealth and Investment Management, which has more than $840 million under management.

Typically, however, his words fall on deaf ears and his clients keep working, Gerber says. His comments echo the observations of other advisors and also match demographic trends identified by two recent academic studies about the increased workforce participation of the retirement-aged population in the United States over the past three decades.

With their research, the academics are trying to figure out why so many people want to keep working beyond the age of 65.

“Employment rates of older men and women in the U.S. have been rising for the past several decades. Over the same period, there have been significant changes in Social Security and private pensions, which may have contributed to this trend,” writes Courtney Coile, an economics professor at Wellesley University and co-director of the National Bureau of Economic Research’s International Social Security project, in a November-released paper, “The Evolution of Retirement Incentives in the U.S.”

Her calculations show that about 38% of men between the ages of 65 and 69 years were working in 2016 (the year for which the most recent data is available). That compares to only 28% of men the same age group working in 1980, prior to the 1983 changes to Social Security rules which allowed for an increase in delayed retirement credits. For women, Coile’s figures follow a similar pattern – about 30% of them between the ages of 65 to 68 years were working in 2016, as compared to only 14% in 1980.

In her paper, Coile measures what she calls the implicit tax rate on work — a calculation based on the net present discounted value of Social Security wealth associated with working an additional year, relative to earnings. She finds “the implicit tax on work after age 65 has dropped by about 15% for a typical worker as a result of Social Security reforms” in the 1980s. If that’s paired with the changes in private pensions since then — a dramatic shift away from defined benefit plans to defined contribution plans — the implicit tax has dropped even more, by about 20%, she writes. That drop explains some of the reason retirement-aged folks remain in the workforce, Coile concludes.

Also publishing this month, Maria Fitzpatrick, an associate professor at Cornell University, has identified another possible explanation, related to private pensions, that keeps people in the labor market longer. When pension plans increase the maximum number of hours employees may work and still receive benefits, people opt to work more, Fitzpatrick has determined from her statistical analysis. “These policies appear to be binding on labor supply decisions of some employees,” she writes in her paper “Pension Reform and Return to Work Policies,” also published by NBER.

Financial advisors suspect a variety of reasons explain client decisions to remain in the workforce past retirement age — including simple fears about boredom.

“With longevity rates going up now, it’s a long time to be in retirement. Some people are not sure what purpose they will have if they leave work,” says Dusty Wallace, the director of planning and the chief compliance officer at Lee Financial in Dallas, which has more than $1 billion under management. Wallace has noticed client interest in the topic is buzzing. A frequent refrain she hears from clients approaching retirement age about their work plans: “Just two more years,” they tell her. “But then after that, they say ‘Two more years,’” Wallace says.

Dusty Wallace

Among Gerber’s clients, he views his clients’ decisions to continue working into even as far as their 80s as an urban lifestyle choice. “They don’t want to leave the cities where they reside,” he says, noting that many of them want to continue to enjoy the cultural aspects of their hometowns, such as Los Angeles, Chicago and New York.

Living in those places, however, diminishes the long-term value of their retirement savings because those places are expensive. If they continue to work in those cities, typically netting a higher salary than they would if they moved to less-urban locations, they can continue to pursue all their expensive extracurricular activities without risking running out of retirement funds, he says.

“They don’t want to change their lifestyle. They don’t want to be inactive,” Gerber says.