(MoneyWatch) As debt ceiling rhetoric heats up and lawmakers get set to address entitlement reform, expect to hear more talk about raising the . Yet while average life expectancy has increased in the U.S., "the rise has been very uneven since the 1970s," according to New York Times columnist and Princeton economist Paul Krugman. In other words, not all Americans qualify as "average" when it comes to living a long, full life.
People who are wealthier and better educated have seen life expectancy increase, while those in the bottom half have been less fortunate. That's why I am nervous when so many people say their retirement plan is to "work longer." The Employee Benefit Research Institute (EBRI) has used data from millions of 401(k) participants and incorporated factors like longevity, investment risk and the potential for catastrophic health care costs to determine whether working five years beyond the "normal" retirement age of 65 helps Americans reach their retirement goals. What they found was that those five extra years may not be enough for many Americans to retire comfortably.
The analysis looked at both income and age. As you might expect, projections for the lowest pre-retirement income quartile are the most sobering. This group would need to defer retirement to age 84 before 90 percent of them would have even a 50 percent probability of achieving comparable pre-retirement living standards. The results improve with income levels, but even among those in the highest income quartile, 90 percent have only a 50 percent chance of having enough to retire by 70. When broken out by age, the news isn't much better: For one-third of households in which the people were between ages 30 and 59 as of 2007, working until age 70 won't provide adequate income in retirement.
All this aside, buried in the report is a glimmer of hope -- working longer does help. While only about half of households age 50-59 in 2007 could retire at 65, the number increases to nearly two-thirds if retirement age is increased to 70. Those extra five years have a dual effect. Not only do workers save more, they also delay dipping into their retirement funds, allowing those funds to continue growing.
In the past, I have extolled some of the non-financial benefits of working longer, namely the continued social interaction and intellectual engagement. A previous EBRI report confirmed that 92 percent of those who worked beyond the traditional retirement age of 65 do so because they want "to stay active and involved," and 86 percent say they "enjoyed working." The problem is that there are some real risks associated with relying on the "work longer" retirement plan, the most significant being: What if you lose your job?
Right now, the unemployment rate is 7.8 percent for all workers and only 5.9 percent for workers over the age of 55. But dig a little deeper and the numbers aren't quite so rosy. While older workers are holding on to their jobs in large numbers, once they lose those positions it is very difficult to land a new one.
According to a 2012 Government Accountability Office study, before the recession "less than a quarter of unemployed older workers were unemployed for longer than 27 weeks. By 2011, this number had increased to 55 percent. Moreover, by 2011 over one-third of all unemployed older workers had been unemployed for over a year."
The data confirm that counting on working longer could be a dangerous assumption for retirement. That's why it's best to use the "three-legged stool" approach to saving during your working years, spending less during retirement and working longer if you are able to do so. Consider this approach a diversified way to reach retirement that allows you to weigh the practicality of each method.
As the EBRI report notes, the trade-off of more saving today versus deferring retirement is an important step in the process, but people should avoid "simplistic 'rules of thumb' that may result in future retirees, through no fault of their own, coming up short."
One way to get started on your retirement planning is to check out EBRI's "Ballpark E$timate" calculator. It's an easy-to-use, two-page worksheet that helps you quickly identify approximately how much you need to save to fund a comfortable retirement. Without a plan you may be flying blind and relying on a "work longer" strategy that you may not be able to execute. In other words, 70 is not the new 65.