Your career may be shorter than you think

One of the ways that people rationalize the decision to delay saving for retirement is planning to retire at an older age, if at all. That’s a sensible aspiration, but many people will lose their jobs in their fifties and will never again come close to their previous incomes, even if they do find full-time work. 

The study linked above puts a different perspective on long-term financial planning. Many people plan to use their last decade or so of work to aggressively catch up on retirement savings. In their late 40’s and early 50’s, many people are making more than they ever have previously, so increasing savings seems less painful. In this study of workers age 50 and above, the punchline is this:

“our analysis found that between the time older workers enter the study and when they leave paid employment, 56 percent are laid off at least once or leave jobs under such financially damaging circumstances that it’s likely they were pushed out rather than choosing to go voluntarily.

Only one in 10 of these workers ever again earns as much as they did before their employment setbacks”

The study also showed that higher education levels provided no protection from these effects.

So, imagine that you have a 50% chance of being laid off or otherwise pushed out of your job after age 50 and that you would subsequently have very low probability of ever reaching a comparable income. This has substantial implications for financial planning. Specifically, people really need to plan for flexibility in their last two decades of work. Assuming that you can find a new job, the average amount of time between jobs is higher for older workers. For people aged 45-54, the average duration of unemployment is 26 weeks. For people aged 55-64, this rises to 30 weeks.

Many financial planners suggest that people maintain about 6 months of living expenses in emergency savings. This seems fairly low if you start to conceptualize having a 50% chance of losing your job after age 50 and that it will probably take you six months to find a new job. If you lose a well-paying job, these years from 50 to 65+ are quite risky. You may be too young to draw a pension (for the lucky few who have a pension) or tap into a 401(k) without penalties and you don’t qualify for Medicare. Private health insurance may be harder to get or more expensive, too.

The best ways to be prepared for these contingencies are (1) to aggressively pay down debt as early as possible, (2) to have a plan to reduce your living expenses, should the need arise, and (3) to keep your skills and knowledge current. Employers may be reluctant to take on older workers, not least because they are perceived as more likely to have health issues, so freelancing or self-employment are also worth considering.