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Balance Sheets Best Practice

Managing Retirement Costs

by Beverly Goldberg

Assessing the Costs of Retirement

Companies facing the loss of employees to retirement must factor in the costs of hiring workers to replace those who leave when deciding how to deal with the issue of retirement. Among the costs to be analyzed are:

  • lost productivity during the time it takes to find a suitable replacement;

  • the costs of finding a replacement for the departing worker;

  • the time needed for the new employee to adapt to the culture and become fully proficient at the job;

  • ancillary costs due to productivity losses by colleagues of the retiring employee as they adjust to the departure and then to working with the new hire.

Measuring the costs of lost productivity during the search for a replacement requires having records (or management knowledge) of the amount of work usually completed by employees in the same position over a given period. Management then must look at the amount of work not being done by the person leaving to determine how much can be taken over by others in the department. In addition, it may be necessary to hire temporary workers from an agency to do much of the work until the replacement is found. Taken together, the loss of completed work, the overtime put in by others in the department, and the cost of temporary workers provides a measure of the costs of the lost productivity.

Analyzing the costs of finding the replacement includes examining the costs of advertising the job opening; agency fees, or bonuses for referrals from current employees; time spent by managers on interviews; and, sometimes, costs of relocation (usually for highly skilled workers).

In general, the cost of replacing an experienced worker averages about 50% of the employee’s annual salary, but that proportion (and cost) rises dramatically for those with specialized skills. For example, according to InformationWeek magazine, “IT employee replacement costs are 2.5 times the annual salary of an IT professional leaving the organization.”3 In addition, this rule of thumb understates the cost of lost productivity when many employees in any given functional area must be replaced over a short period.

Some observers contend that the costs of replacing older workers may be largely or wholly offset by younger workers’ lower pay and benefits (although that assumes that younger workers with the needed skills are available). While some costs, such as higher salaries due to seniority, more accrued vacation time, and larger contributions to pension plans (and in the United States higher health care premiums) are real, many others that are given as reasons not to retain older workers are myths.4 For example, some claim that older workers take more sick days than younger workers. According to the US Bureau of Labor Statistics, in 2007 the absence rate of full-time workers aged 25 to 54 was 3.2 per 100, and workers aged 55 and over were absent at only a marginally higher rate: 3.6 per 100.

Programs Aimed at Retaining Older Workers

Solutions to the problem posed by the likelihood that large numbers of baby boomers will retire simultaneously include keeping a portion of these would-be retirees in the workforce by modifying traditional work rules. A Towers Perrin survey of workers in the G7 countries found that, while about 40% of workers over age 50 indicated that they plan to retire from their current positions in the next five years, almost the same number stated that they plan to work in some capacity after retiring from their current jobs.5

The same study found that almost half of workers nearing retirement find the possibility of part-time work and flexible work for their present company enticing, while a little more than a third would be attracted by the possibility of working from home. About a fourth of those planning to retire say they would stay on if they were offered retention bonuses, credits to pension benefits for delaying retirement, or the ability to collect partial pensions while working. The same proportion would be interested in returning as contractors.

Many companies that already have encountered problems due to retirements have instituted programs both to develop replacements and to hold on to some older workers, including:6

  • training programs for younger workers who have the basics they need to acquire the specific skills that will be lost;

  • mentoring programs to transfer specialized knowledge from retiring workers to younger staff;

  • phased retirement policies that enable employees to reduce the number of days they work each week gradually over a period of years;

  • flexible work options that would allow employees to job share (two older workers sharing a single job) or to work on a reduced schedule;

  • telecommuting programs that allow people to work from home either a few days a week or full time;

  • consulting and contracting arrangements that can be used to increase staff at the busiest time of the year;

  • keeping in touch with retirees and offering them special bonuses for returning in some capacity after sampling retirement.

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Further reading


  • DeLong, David W. Lost Knowledge: Confronting the Threat of an Aging Workforce. New York: Oxford University Press, 2004.
  • Dychtwald, Ken, Tamara J. Erikson, and Robert Morison. Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent. Boston, MA: Harvard Business School Press, 2006.
  • Goldberg, Beverly. Age Works: What Corporate America Must Do to Survive the Graying of the Workforce. New York: The Free Press, 2000.


  • Towers Perrin. Perspectives of employers, workers and policymakers in the G7 countries on the new demographic realities. September 2007.


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