Learning Objectives
By the end of this section, you will be able to:
- Identify the important factors in the decision to retire
- Describe the various styles of or approaches to retirement
- Explain common barriers to retirement
Clarence is in his early sixties and starting to consider retiring from his job as a crane operator for a construction firm. In fact, he just had a meeting with the human resources department about his retirement plan that spurred him to think more seriously about this. Because some of his friends have retired, he knows that retirement doesn’t look the same for everyone. Some of his friends spend their days tending to grandchildren or enjoying hobbies. Others have felt financial strain and returned to work at least part time. And he knows others who’d like to retire but continue to work because they won’t qualify for Medicare until they turn sixty-five years old and can’t afford to pay for health insurance out of pocket. With all this in mind, Clarence thinks about his finances and what he hopes his life will look like when he leaves his position.
In this section, you'll learn about financial and nonfinancial considerations related to stepping away from work or a career, and public policies that made retirement more accessible for decades and more recent policies that have reversed that trend.
Considerations for Retirement
Retirement, the act of permanently leaving the workforce, is something many adults experience. Considering when to retire, planning for retirement, and deciding what a retired life will look like are all important parts of the process (Figure 16.11). You should recognize, however, that retirement isn’t universal; therefore, it should be considered a common part of adult life but not an inevitable one.
Since retirement brings about major life changes, older adults must navigate many issues in taking this step. The most obvious is financial preparation since leaving the workforce necessitates a change in how one's income is attained. Considering that the average retirement age in the United States is around age sixty-four years (Warshawsky, 2022) and average life expectancy is twelve to fifteen years longer than that, careful financial planning is crucial. This is why financial experts recommend starting to save for retirement as early as possible, to benefit from the effects of time and compound interest on any investments. Recent data indicate that 61 percent of adults over age fifty years are worried they won’t have enough to live on in retirement, and 20 percent of adults over age fifty years aren’t saving for it at all (Brown, 2024). This may force older adults in the United States, for example, to rely on Social Security, which may not provide enough funds to cover all living expenses.
Link to Learning
Financial experts point to the benefits of compound interest as a compelling reason to start saving for retirement as soon as you begin generating a stable income. This article from CNBC describes why many people disregard the potential benefits of compound interest and provides suggestions for getting an early start on retirement savings.
Assume you took the advice about retirement savings seriously and had the means to build a sizable nest egg. You’ve overcome a major obstacle, but you still have other things to consider, such as whether you want to retire. Research indicates that working can provide many benefits beyond financial security. For example, cognitive stimulation commonly decreases in retirement, and this has been associated with increasing cognitive decline experienced shortly after leaving work (Celidoni et al., 2017). Work can have socioemotional benefits as well, such as social interactions, friendships, and a sense of fulfillment and identity (Xiao et al., 2020; Zhang et al., 2022).
Despite these potential benefits, most individuals eventually retire. And much like work, retirement itself can have benefits. A review of twenty-two longitudinal studies found that most retirees report benefits to mental health, such as lower levels of depression, anxiety, or stress (van der Heide et al., 2013). Improved mental health isn’t surprising considering many retirees are trading a stressful or demanding time at work for more enjoyable activities of choice (Cohen-Mansfield & Regev, 2018). Retirement can also be a time of renewed identity exploration as new retirees redefine many of their relationships and activities (Barnes & Parry, 2004; Moffatt & Heaven, 2017).
A Vision for Retirement
When they think of retiring, many people imagine spending their free time enjoying life. Research suggests that leisure goals are a priority for many retirees, such as engaging in hobbies (Scherger et al., 2011), traveling (Siren & Haustein, 2016), exercising (Barnett et al., 2012), volunteering, and even other kinds of work. However, the way people actually spend their time after retirement is strongly associated with SES and health, and low SES and poor health are associated with lower participation in leisure activities (Scherger et al., 2011). Responsibilities like caregiving can also limit people’s opportunities to choose what they want their retirement to look like.
Some older adults spend their retirement working. This seems counterintuitive, yet the data are clear: many older adults work in retirement, though often in different capacities than before. When a person of retirement age leaves the workplace gradually instead of abruptly, it is referred to as phased retirement. They might work decreasing hours, for instance, or take on more remote work or contract work until they are fully retired (Henkens et al., 2021; Johnson, 2011). Another option is bridge employment, which is a different job a person takes on after retiring, either in the same profession they had or in a completely different field (Kalokerinos et al., 2015). For example, a retired postal employee may work concessions at a theme park in Orlando, Florida, as a form of such employment.
These less traditional forms of retirement can benefit both employers and older workers. Employers benefit from having experienced workers on hand who can not only perform their own tasks but also help train new staff. Workers who aren’t ready to retire can slowly decrease their workload but still earn income until they retire completely. Those who are becoming less able to keep up with the demands of their job can lighten responsibilities before fully leaving the workforce.
While some older adults opt to continue with paid work in some capacity, many others take on volunteer work. Around one in four retirees volunteer, nearly identical to the percentage of younger volunteers, but older workers donate almost 40 percent more hours (Turner et al., 2020). They typically report that volunteering benefits themselves, those they serve, their families, and their communities (Morrow-Howell et al., 2009).
It appears that engagement with volunteer work is most common in the earlier stages of retirement. Over time, however, retirees are likely to stop volunteering. While this decision could be due to health and other age-related declines, research suggests that many retirees learn about volunteer opportunities through their work relationships. As time passes, some of these relationships aren’t maintained, potentially decreasing both information and motivation (Tang, 2016).
Barriers to Retirement
As mentioned, retirement is a common life event for many people. Figures from the Congressional Research Service suggest that from 2012 to 2022, the percentage of the retired U.S. adult population increased dramatically, from 16.1 to 19.3 percent (Li, 2022). But this increase is mainly due to longer life expectancy and the large number of retiring baby boomers, not an increase in retirement accessibility. From at least the early twentieth century until the mid-1980s, retirement grew increasingly accessible in the United States, largely due to the introduction of Social Security benefits and improved economic conditions, and the average age of retirement trended steadily downward. In 1985, however, that trend started to reverse, and we now see a consistent picture of older adults having to remain in the workforce well into their later years (Garber, 2024; Quinn, 1999). In fact, there are several threats and barriers to retirement on both individual and societal levels.
Financial Barriers
One obvious challenge is simply not being able to afford retirement. This has resulted in a current trend to delay retirement, allowing time to save more (Garber, 2024) (Figure 16.13).
A recent study concluded that 75 percent of U.S. workers aren’t saving enough to retire at their current cost of living and will have to make serious cuts to their living expenses and/or work beyond the typical retirement age (Gomes et al., 2020) (Figure 16.14).
Link to Learning
Read about how more people are realizing in older age that they are not financially able to retire to learn more. This story from CNN describes this dilemma in greater detail and profiles people in this situation.
Why are people financially unprepared for retirement these days? Has knowledge about investment strategies and financial planning decreased since 1985? The answer probably lies in policy changes that altered the financial landscape of retirement in the U.S. Until the 1970s, the predominant method of saving for retirement among the U.S. workforce was the traditional pension plan. A pension plan is an invested fund operated and managed by an employer. The employer assumes all the risk of fluctuating market investments and agrees to pay employees an established income from the fund, guaranteed for life (Friedberg & Owyang, 2002). However, in 1978, Congress passed a new tax code that introduced the 401(k) plan as an alternative to pension plans. Since then, pensions have become much more rare as retirement plans.
In a 401(k) plan, employees must contribute to their own retirement fund, and the employer may match these contributions up to a certain percentage of income. Employers typically provide a range of funding plans for employees to choose from, but decisions and risks related to investments and withdrawals ultimately fall on the employee (Lee, 2022). Thus, the balance in 401(k) plans depends on the amount saved, how much of it the employer matched, and how much money the investments earned given the employee’s investment choices. Unlike a pension plan, a 401(k) carries no guarantee of income during retirement, meaning the balance can be depleted, which might force retirees to reenter the workforce or rely on a retirement benefit program alone, such as Social Security in the United States. That said, 401(k) plans have some benefits. They can follow the employee from job to job, which is better suited to today’s more mobile work (Lee, 2022). However, nearly half the U.S. workforce, about fifty-seven million people, lacks access to an employer-provided retirement plan, and this is even more likely to be the case for people in low-income jobs and people of color (John et al., 2022).
Societal issues can also be a factor in financial readiness to retire. Many workers in the United States are not paid a living wage, meaning their income is not enough to provide for basic needs such as food, housing, transportation, and childcare, much less save for retirement. Data released by the Massachusetts Institute of Technology indicate the average living wage for a family of four with two working adults is $25.02 per hour, but the federal minimum wage is only $7.25 per hour (Glasmeier, 2023), although some states have minimum wage laws at higher levels of pay. Nearly a third of workers (32 percent) are paid less than $15 per hour, especially women and people of color (Henderson, 2022). For these individuals, meeting current needs is a huge challenge, and many are forced to rely on public assistance and charity despite working full time.
As a result, many workers with low incomes frequently have no retirement income beyond Social Security benefits and are at increased risk of poverty and food insecurity in retirement. Both poverty and food insecurity are more common among younger than older baby boomers (Mudražija & Butrica, 2022), suggesting that the change from employer-provided pensions to 401(k) plans may already be affecting retirees’ financial security.
Intersections and Contexts
Retirement Around the World
Not surprisingly, different countries have different approaches to supporting older adults. Here are a few examples of different policies.
- In Jamaica, the National Council for Senior Citizens provides services such as home health aides, meal and grocery delivery, and housekeeping to all older adults free of charge and regardless of income. There’s also a special program to help pay for prescription medicines for certain chronic illnesses like asthma and diabetes (Jamaican Information Service, 2021).
- Japan has two public pension systems, one of which is available to people who are self-employed and spouses of employees. There are also employer-sponsored plans similar to 401(k) plans (Investment Company Institute, 2021).
- South Africa provides a pension for citizens, permanent residents, and refugees over the age of sixty years. This pension is primarily meant to support older adults with low incomes, so there are certain income and asset requirements to qualify (South African Government, 2024).
- Nepal provides small allowances and pensions for older adults, including widows (through the Single Women's Allowance program), but much of the instrumental and financial support for older adults comes from family members, community groups, and religious organizations. Most health care is private and expensive, placing a large financial burden on families (Shrestha et al., 2021).
- The Canadian pension system is available to anyone over age sixty years who has made at least one contribution to the plan. This contribution can be made through employment or through credits received from spouses including ex-spouses or common-law partners at the end of a relationship. People who took time off work due to disability, health problems, or childrearing may be able to get partial credit toward contributions (Government of Canada, 2024).
Additional Barriers
Some people experience additional barriers to retirement. Psychologically, they may continue in their job to escape the “occupational void” and loss of identity they associate with leaving the workforce (Bratun & Zurc, 2020). Still others may be anxious about whether they will be able to manage their increased free time and find meaningful things to do, and thus they continue to work (Penn & Lent, 2021).
Social factors can also contribute to anxiety about retirement. Someone with a strong social network may have the instrumental and emotional support to retire earlier. But social responsibilities can also delay retirement. For example, many people wait until their children are completely independent or until their spouse can retire as well (Wang & Shi, 2014).
Health is another potential barrier. For some individuals, health concerns may force an earlier retirement. Research suggests that workers with low incomes are more likely to be forced into early retirement for health reasons, which can create a financial strain for those unable to obtain disability-related financial support (Rad et al., 2017). Health problems can also affect retirement if they prevent retirees from engaging in desired activities. This drawback can result in a lower quality of life during retirement (De León et al., 2020).
References
Barnes, H. M., & Parry, J. (2004). Renegotiating identity and relationships: Men and women’s adjustments to retirement. Ageing & Society, 24(2), 213–233. https://doi.org/10.1017/s0144686x0300148x
Barnett, I., van Sluijs, E. M. F., & Ogilvie, D. (2012). Physical activity and transitioning to retirement. American Journal of Preventive Medicine, 43(3), 329–336. https://doi.org/10.1016/j.amepre.2012.05.026
Bratun, U., & Zurc, J. (2020). The motives of people who delay retirement: An occupational perspective. Scandinavian Journal of Occupational Therapy, 29(6), 482–494. https://doi.org/10.1080/11038128.2020.1832573
Brown, S. K. (2024, January). AARP Financial Security Trends Survey. AARP Research. https://doi.org/10.26419/res.00525.040
Celidoni, M., Bianco, C. D., & Weber, G. (2017). Retirement and cognitive decline. A longitudinal analysis using SHARE data. Journal of Health Economics, 56, 113–125. https://doi.org/10.1016/j.jhealeco.2017.09.003
Cohen-Mansfield, J., & Regev, I. (2018). Retirement preparation programs: An examination of retirement perceptions, self-mastery, and well-being. Research on Social Work Practice, 28(4), 428–437. https://doi.org/10.1177/1049731516645194
de León, L. P., Mangín, J. P. L., & Ballesteros, S. (2020). Psychosocial determinants of quality of life and active aging. A structural equation model. International Journal of Environmental Research and Public Health, 17(17), 6023. https://doi.org/10.3390/ijerph17176023
Friedberg, L. & Owyang, M. T. (2002). Not your father’s pension plan: The rise of 401(k) and other defined contribution plans. Review/Federal Reserve Bank of St. Louis, 84(1), 23–34. https://research.stlouisfed.org/publications/review/2002/01/01/not-your-fathers-pension-plan-the-rise-of-401k-and-other-defined-contribution-plans
Garber, J. (2024, May 22). What is the average retirement age in the U.S.? NerdWallet. https://www.nerdwallet.com/article/investing/social-security/average-retirement-age-us#:~:text=The%20average%20retirement%20age%20in%20the%20United%20States%20is%2061,retire%20at%2066%20on%20average
Glasmeier, A. K. (2023). 2023 Living wage calculator. Massachusetts Institute of Technology. https://livingwage.mit.edu/articles/103-new-data-posted-2023-living-wage-calculator
Gomes, F., Hoyem, K., Hu, W.-Y., & Ravina, E. (2020, February 4). Retirement savings adequacy in U.S. defined contribution plans. Social Science Research Network. https://doi.org/10.2139/ssrn.3294422
Government of Canada. (2024). CPP retirement pension. https://www.canada.ca/en/services/benefits/publicpensions/cpp.html
Henderson, K. (2022, March 21). The crisis of low wages in the US. Oxfam. https://www.oxfamamerica.org/explore/research-publications/the-crisis-of-low-wages-in-the-us/
Henkens, K., van Dalen, H. P., & van Solinge, H. (2021). The rhetoric and reality of phased retirement policies. Public Policy & Aging Report, 31(3), 78–82. https://doi.org/10.1093/ppar/prab012
Investment Company Institute. (2021). The Japanese retirement system. https://www.ici.org/system/files/2021-12/21_bro_japanese_retirement.pdf
Jamaican Information Service. (2021, September 30). Government support for the elderly. https://jis.gov.jm/information/get-the-facts/government-support-for-the-elderly/
John, D., Koenig, G., & Malta, M. (2022). Payroll deduction retirement programs build economic security. AARP Public Policy Institute. https://doi.org/10.26419/ppi.00164.001
Johnson, R. W. (2011). Phased retirement and workplace flexibility for older adults: Opportunities and challenges. Annals of the American Academy of Political and Social Science, 638(1), 68–85. https://doi.org/10.1177/0002716211413542
Jones, J. M. (2022, July 22). More in U.S. retiring, or planning to retire, later. Gallup. https://news.gallup.com/poll/394943/retiring-planning-retire-later.aspx
Kalokerinos, E. K., von Hippel, C., & Henry, J. D. (2015). Job attitudes are differentially associated with bridge employment and phased retirement among older Australian employees. Work, Aging and Retirement, 1(2), 190–201. https://doi.org/10.1093/workar/wau014
Lee, J. (2022, April 28). How 401(k) accounts killed pensions to become one of the most popular retirement plans for U.S. workers. CNBC. https://www.cnbc.com/2021/03/24/how-401k-brought-about-the-death-of-pensions.html
Li, Z. (2022, Jun 27). Retirement Trends in United States, 2000–2022. Congressional Research Service. https://crsreports.congress.gov/product/pdf/IN/IN11959#:~:text=Figure%201%20shows%20that%20the,March%202022%20(19.3%25)%20period
Moffatt, S., & Heaven, B. (2017). ‘Planning for uncertainty’: Narratives on retirement transition experiences. Ageing & Society, 37(5), 879–898. https://doi.org/10.1017/s0144686x15001476
Morrow-Howell, N., Hong, S.-l., & Tang, F. (2009). Who benefits from volunteering? Variations in perceived benefits. Gerontologist, 49(1), 91–102. https://doi.org/10.1093/geront/gnp007
Mudražija, S., & Butrica, B. A. (2022). The dynamic nature of poverty and food insecurity among older adults: Evidence from the health and retirement study. Applied Economic Perspectives and Policy, 45(1), 262–279. https://doi.org/10.1002/aepp.13329
Penn, L. T., & Lent, R. W. (2021). Retiring or rewiring? Test of a social cognitive model of retirement planning. Journal of Counseling Psychology, 68(5), 538–549. https://doi.org/10.1037/cou0000530
Quinn, J. F. (1999, May 11). Has the early retirement trend reversed? Boston College Working Papers in Economics, No. 424. Boston College Department of Economics. https://econpapers.repec.org/paper/bocbocoec/424.htm
Scherger, S., Nazroo, J., & Higgs, P. (2011). Leisure activities and retirement: Do structures of inequality change in old age? Ageing & Society, 31(1), 146–172. https://doi.org/10.1017/s0144686x10000577
Shrestha, S., Aro, A. R., Shrestha, B., & Thapa, S. (2021). Elderly care in Nepal: Are existing health and community support systems enough. SAGE Open Medicine, 9, 20503121211066381. https://doi.org/10.1177/20503121211066381
Siren, A. K., & Haustein, S. (2016). How do baby boomers’ mobility patterns change with retirement? Aging & Society, 36(5), 988–1007. https://doi.org/10.1017/s0144686x15000100
South African Government (2024). Old age pension. https://www.gov.za/services/services-residents/social-benefits/old-age-pension
Tang, F. (2016). Retirement patterns and their relationship to volunteering. Nonprofit and Voluntary Sector Quarterly, 45(5), 910–930. https://doi.org/10.1177/0899764015602128
Turner, J. A., Klein, B. W., & Sorrentino, C. (2020, July). Making volunteer work visible: Supplementary measures of work in labor force statistics. Monthly Labor Review. https://doi.org/10.21916/mlr.2020.15
van der Heide, I., van Rijn, R. M., Robroek, S. J. W., Burdorf, A., & Proper, K. I. (2013). Is retirement good for your health? A systematic review of longitudinal studies. BMC Public Health, 13, 1180. https://doi.org/10.1186/1471-2458-13-1180
Wang, M., & Shi, J. (2014). Psychological research on retirement. Annual Review of Psychology, 65, 209–233. https://doi.org/10.1146/annurev-psych-010213-115131
Warshawsky, M. J. (2022, May). The average US retirement age increased over the past 30 years. American Enterprise Institute. https://www.aei.org/wp-content/uploads/2022/05/The-Average-US-Retirement-Age-Increased-over-the-Past-30-Years.pdf
Xiao, J., Mao, J.-Y., Quan, J., & Qing, T. (2020). Relationally charged: How and when workplace friendship facilitates employee interpersonal citizenship. Frontiers in Psychology, 11. https://doi.org/10.3389/fpsyg.2020.00190
Zhang, Y., Sun, J.-M., Shaffer, M. A., & Lin, C.-H. (2022). High commitment work systems and employee well‐being: The roles of workplace friendship and task interdependence. Human Resource Management, 61(4), 399–421. https://doi.org/10.1002/hrm.22093