Planning to continue working in retirement? Why do you need a backup plan? | Smart Change: Personal Finance

The benefits of continuing to work are clear. You can continue to contribute to your retirement account as you delay your retirement contributions. Working longer may also allow you to defer collecting Social Security — giving you higher interest later.

Unfortunately, working deeply into your retirement years may not be a realistic plan.

The same EBRI survey asked retirees to reflect on their experiences with working in retirement. More than three-quarters of retirees (78%) said they do not use work as a source of income. Furthermore, 47% of retirees admitted to retiring earlier than expected. Among that group, the vast majority associated early retirement with circumstances beyond their control. especially:

• 32% retired early due to illness
• 33% retired earlier due to corporate downsizing or restructuring
• 13% retire early to care for a spouse or family member
• 7% retired early because their skills no longer match their jobs

Here’s the takeaway. A retirement plan that depends on your salary may expose you to the worst financial surprises. As the data indicates, older adults usually retire earlier than they would like. If this happens to you and you are not financially prepared, your early retirement could bring a significant reduction in your lifestyle.

Saving and investing is often one of the best steps you can take to protect against early retirement than planned. If you have a 401(k) workplace, take advantage of high contribution limits and catch-up contributions if you qualify.

This year, you can contribute up to $20,500 to your 401(k). The IRS also allows $6,500 in compensatory contributions if you turn 50 before the end of the year.

Using these compensation contributions can significantly increase your savings balance when you retire. Let’s say you invest the full compensation amount of $6,500 annually between the ages of 50 and 65. Assuming your return is 7% in the market, these contributions will grow to about $160,000.

You can also store more money in a Health Savings Account (HSA) if you qualify. For everyone under the age of 50, the 2022 HSA contribution limit is capped at $3,650 when you have self-only, high-deductible health insurance. If you have family coverage in a high-deductible health plan, your contribution limit is $7,300 for the year. The year you turn 50, you can add $1,000 to those limits.

Reducing high-priced debt and building your cash reserves will also strengthen your finances. You’ll want to pay off your high-interest debt before you retire, anyway. Doing so now frees up cash to fund higher retirement contributions.

Significant cash savings give you flexibility to manage during all kinds of unforeseen circumstances. Suppose you are laid off in your late fifties. You can use your cash on hand to pay bills temporarily while you explore the job market and/or rework your retirement financing plan. Without sufficient cash reserves, your only option may be to start your 401(k) retirement distributions immediately.

In personal finance, it’s always smart to think of a worst-case scenario. In terms of retirement, the worst case may be losing your paycheck five or 10 years earlier than you planned.

Increasing retirement contributions now is usually the best defense against forced early retirement. Paying off high-interest debt and increasing your cash savings are also smart moves. You are not likely to regret any of these steps either. Even if you end up working for as long as you want to, it’s always a good idea to have solid finances.

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